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PJSC "BANK VOSTOK"

International Financial Reporting StandardsFinancial Statements andIndependent Auditor’s Report

31 December 2016

(ii)

CONTENTS

Independent Auditor’s Report

FINANCIAL STATEMENTS

Statement of Financial Position...................................................................................................................................... 1Statement of Profit or Loss and Other Comprehensive Income ..................................................................................... 2Statement of Changes in Equity..................................................................................................................................... 3Statement of Cash Flows ............................................................................................................................................... 4

Notes to the Financial Statements

1 Introduction ......................................................................................................................................................... 52 Operating Environment of the Bank.................................................................................................................... 53 Summary of Significant Accounting Policies ....................................................................................................... 64 Critical Accounting Estimates, and Judgements in Applying Accounting Policies ............................................ 145 Adoption of New or Revised Standards and Interpretations ............................................................................. 156 New Accounting Pronouncements.................................................................................................................... 167 Cash and Cash Equivalents ............................................................................................................................. 188 Balances with the National Bank of Ukraine ..................................................................................................... 189 Due from Other Banks ...................................................................................................................................... 1810 Loans and Advances to Customers .................................................................................................................. 2011 Investment Securities Available for Sale........................................................................................................... 2712 Premises, Equipment and Intangible Assets .................................................................................................... 2913 Other Financial and Non-Financial Assets........................................................................................................ 3014 Due to Other Banks .......................................................................................................................................... 3015 Current Accounts and Deposits ........................................................................................................................ 3116 Other Borrowed Funds ..................................................................................................................................... 3217 Other Financial and Non-Financial Liabilities.................................................................................................... 3318 Subordinated Debt............................................................................................................................................ 3319 Share Capital .................................................................................................................................................... 3320 Interest Income and Expense ........................................................................................................................... 3421 Fee and Commission Income and Expense ..................................................................................................... 3522 Other Operating Income ................................................................................................................................... 3523 Administrative and Other Operating expenses ................................................................................................. 3624 Income Taxes ................................................................................................................................................... 3625 Financial Risk Management ............................................................................................................................. 3826 Management of Capital..................................................................................................................................... 5027 Contingencies and Commitments ..................................................................................................................... 5028 Fair Value of Financial Instruments .................................................................................................................. 5329 Presentation of Financial Instruments by Measurement Category ................................................................... 5630 Related Party Transactions .............................................................................................................................. 56

Limited Liability Company Audit Firm "PricewaterhouseCoopers (Audit)", 75 Zhylyanska Str. Kyiv, 01032, Ukraine T: +380 44 354 0404, F+380 44 354 0790, www.pwc.com/ua

Independent Auditor’s Report To the Shareholders and Management Board of PUBLIC JOINT STOCK COMPANY “BANK VOSTOK”

Our opinion

In our opinion, the financial statements present fairly, in all material respects, the financial position of the PUBLIC JOINT STOCK COMPANY “BANK VOSTOK” (the “Bank”) as at 31 December 2016, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (the “IFRS”).

What we have audited

The Bank’s financial statements comprise:

the statement of financial position as at 31 December 2016;

the statement of profit or loss and other comprehensive income for the year then ended;

the statement of changes in equity for the year then ended;

the statement of cash flows for the year then ended; and

the notes to the financial statements, which include significant accounting policies and other explanatory information.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

We are independent of the Bank in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code). We have fulfilled our other ethical responsibilities in accordance with the IESBA Code.

Emphasis of matter

We draw your attention to Note 2 to these financial statements. The operations of the Bank and those of other entities in Ukraine have been affected and may continue to be affected in the foreseeable future by the continuing political and economic uncertainties in Ukraine.

Our opinion is not qualified in respect of this matter.

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Our audit approach

Overview

Overall materiality: UAH 10 million.

Key audit matters:

Impairment of loans and advances to customers;

Compliance with regulatory matters.

We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we considered where management made professional judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. We also addressed the risk of management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.

We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the financial statements as a whole, taking into account the structure of the Bank, the accounting processes and controls, and the industry in which the Bank operates.

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Materiality

The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall materiality for the financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate on the financial statements as a whole.

Overall materiality UAH 10 million.

How we determined it We determined the above materiality as 1% of the Bank’s total interest, fee and commission income and other operating income (together – “total revenue”) for the current year.

Rationale for the materiality benchmark applied

We chose total revenue as the benchmark because it represents a more stable measure reflecting the Bank’s operations than profit in recent years, given the volatile economic environment in which the Bank operates. We chose 1%, which in our experience is within the range of acceptable quantitative materiality thresholds for the benchmark.

Key audit matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

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Key audit matter How our audit addressed the Key audit matter

Impairment of loans and advances to customers

We focused on this area because the management makes complex and subjective judgements over both timing of recognition of impairment and the estimation of the size of such impairment, in particular:

for significant corporate loans assessed for impairment on an individual basis such assumptions and judgements include identification of loss events, estimation of timing and amount of future cash flows including those expected from realisation of collateral;

for retail and individually insignificant corporate loans and individually significant unimpaired loans, which are assessed for impairment on a portfolio basis, such judgements include the period of historic losses used for calculation of the probability of default and loss given default and other inputs used in calculating impairment losses.

Note 3 Significant Accounting Policies, Note 4 Critical Accounting Estimates and Judgements in Applying Accounting Policies and Note 10 Loans and Advance to Customers included in the financial statements provide detailed information on the provision for impairment of loans and advances to customers.

Our audit approach included the following:

- For individually significant corporate loans we selected a sample of borrowers, which represented a significant proportion of the total gross loan portfolio. For the selected loans we checked whether impairment indicators were appropriately identified by the management. Where impairment signs had been identified, we compared this to management’s judgement and investigated any differences. For those significant borrowers with indications of impairment we examined the forecasts of future cash flows prepared by the management to support the calculation of the impairment, challenged their assumptions and compared the estimates to external evidence, where available, and tested the accuracy of the impairment calculation applying these assumptions.

- For all other loans, which are assessed for impairment on a portfolio basis, we tested the calculations of the probability of default and loss given default on the entire population of such loans. We also tested data used in the automated models including the “bucketing” into delinquency groupings and challenged and applied sensitivities to the underlying critical assumptions. We also assessed the design and consistency of models with the requirements of IFRS.

We verified backtesting of management estimates and various types of analytical procedures over the adequacy of provision for loans and advance to customers.

We found no material exceptions in these tests.

Compliance with regulatory matters

We focused on this matter because compliance with regulatory matters is one of the key aspects of going concern assessment. In 2016 the National Bank of Ukraine (the “NBU”, the “Regulator”) in accordance with the NBU regulation N o59 dated 4 February 2016 “On conducting the diagnostic study of banks” (the “Regulation”) performed

We have reviewed the Bank’s compliance to date with the Action plan approved by the Regulator.

We analysed the Bank’s compliance with prudential ratios as at the reporting date and performed recalculation of regulatory capital of the Bank as at the reporting date.

We reviewed the written communication between the Bank and the Regulator and inquired management about the details of the communication with the Regulator. We did this to determine whether findings from the Regulator require refinement of our audit approach.

We also assessed the Bank’s ability to comply with the capitalisation

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diagnostic review and stress-testing of the Bank (Note 26). As a result, in December 2016 the Bank submitted to the NBU the Action plan on the increase of capitalisation (improvement of capital adequacy) for the period from 18 October 2016 to 1 January 2019. This Action plan was approved by the Regulator on 21 March 2017. In accordance with the capitalisation plan, the Bank should increase the regulatory capital by UAH 252,117 thousand by 1 January 2019. The Action plan also contains the list of actions for UAH 160,801 thousand forming part of the total UAH 252,117 thousand and completed by the Bank at the date of submission of the Action plan for approval to the NBU. In addition, in 2016, the NBU introduced the new Regulation 351 “On determination of the value of credit risk on banking operations” (the “Regulation 351”), effective from 3 January 2017. New regulation amends the method of calculation of credit risk for the purposes of determination of capital adequacy ratio.

programme in the future. For this purpose we have analysed the Bank’s budgets for the periods covered by the capitalisation programme, challenged the assumptions used by the management for the preparation of those budgets.

We have also considered the impact of the new Regulation 351 on the Bank’s compliance with the capital adequacy ratio as at 1 February 2017.

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Other information

Management is responsible for the other information. The other information comprises the Bank’s Annual Issuer’s report (but does not include the financial statements and our auditor’s report thereon), which is expected to be made available to us after the date of this auditor’s report.

Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

When we read the Bank’s Annual Issuer’s report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance.

Responsibilities of management and those charged with governance for the financial statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is responsible for assessing the Bank’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Bank or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Bank’s financial reporting process.

Auditor’s responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

PJSC "BANK VOSTOK"Notes to the Financial Statements - 31 December 2016

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1 Introduction

These financial statements have been prepared in accordance with International Financial ReportingStandards for the year ended 31 December 2016 for PUBLIC JOINT STOCK COMPANY “BANKVOSTOK” (the “Bank”).

The Bank was founded on 23 April 2002 and registered by the National Bank of Ukraine (NBU) on17 October 2002 as CJSC Agrobank. In December 2006 the Bank became a part of Home Credit Group.On 27 March 2009 the Bank was re-registered as open joint-stock company and on 27 May 2010 – aspublic joint-stock company.

On 21 December 2011, 100% of the Bank’s shares were acquired by the group of legal entities andprivate individuals. During 2012, the changes in the shareholders’ structure occurred. As at31 December 2016, 100% of the Bank’s shares are held by Vostok Capital LLC.

The main ultimate shareholders of the Bank are Mr. V. Kostelman, Mr. V. Morokhovskiy andMrs. L. Morokhovska. Refer to Note 30.

The Bank provides banking services to individuals and companies, including taking deposits and grantingloans, investing in securities, transferring payments in Ukraine and abroad, exchanging of currencies andother services. The Bank participates in the state deposit insurance scheme (registration #157 dated19 November 2012), which operates according to the Law #4452-VI “On Individuals Deposits GuaranteeSystem” dated 23 February 2012. Individuals Deposits Guarantee Fund guarantees repayment ofindividual deposits up to UAH 200 thousand per individual in case the National Bank of Ukraine takesdecision to include the bank into the default category, and the procedure of exclusion of the bank from themarket is started by the Individuals Deposits Guarantee Fund.

As at 31 December 2016, the Bank has 35 subunits: 33 outlets in Dnipro, Odessa, Kherson, Mykolaiv,Lviv, Cherkasy, Kiev, Kharkiv, Poltava, Zaporizhya and Sumy regions, and 2 representative offices inKyiv. For comparison, as at 31 December 2015, the Bank had 35 outlets in Dnipro, Odessa, Odessaregion, Kiev, Lviv, Cherkasy, Poltava, Kharkiv, Kherson and Zaporizhya, and also 3 representative officesin Kyiv.

The Bank’s registered address is 24 Kursantskaya Street in Dnipro, Ukraine. The Bank’s head officesubunits are located at 1-B Kanatna Street in Odessa, Ukraine and at 12 Krutogirnyi Uzviz in Dnipro,Ukraine.

Presentation currency. These financial statements are presented in Ukrainian hryvnias ("UAH"), unlessotherwise stated.

2 Operating Environment of the Bank

The political and economic situation in Ukraine during 2016 was mainly driven by factors originated in2014 and 2015 and characterised by instability that has led to a deterioration of State finances, volatilityof financial markets, illiquidity on capital markets, higher inflation rate and a depreciation of the nationalcurrency against major foreign currencies.

In 2016, the Ukrainian economy demonstrated signs of recovery. According to the State Statistics Serviceof Ukraine, the gross domestic product (GDP) increased in 2016 by 1% year-on-year (2015: a 10%decline for the year), and the consumer price inflation rate dropped to 12% in annual terms (in December2015: 43%). The high devaluation rate of Ukrainian Hryvnia against major foreign currencies observed in2014 and 2015 significantly slowed down in 2016. As at 31 December 2016, the official exchange rate ofHryvnia against US dollar was UAH 27.19 per USD 1, compared to UAH 24.00 per USD 1 as at 31December 2015 (31 December 2014: UAH 15.76 per USD 1). To constrain further devaluation of Hryvniathe NBU has imposed a number of restrictions on operations with foreign currency including: a temporaryban on payment of dividends in foreign currency; a temporary ban on early repayment of debts to non-residents; mandatory sale of 75% of revenue in foreign currency and other restrictions on cash and non-cash operations. The central bank of Ukraine prolonged these restrictions several times during 2015 and2016. On 7 June 2016, the NBU issued a regulation that liberalises some administrative restrictions tostabilise the situation in the money and foreign exchange markets. In particular, the regulation eases therequired mandatory sale of revenue in foreign currency received by legal entities in Ukraine from 75% to65%. In addition, the settlement period for export-import transactions in foreign currency was increasedfrom 90 to 120 days starting from 28 July 2016.


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2 Operating Environment of the Bank (Continued)

Also starting from 13 June 2016, the NBU allowed Ukrainian companies to pay dividends to non-residentswith a limit of USD 5 million per month.

In December 2016, the international rating agency Standard & Poor’s affirmed the sovereign credit ratingof Ukraine at B- with stable outlook.

The Ukrainian Government continues to cooperate with the International Monetary Fund. In particular, thethird tranche of USD 1 billion was provided in September 2016 under the Extended Fund Facility (“EFF”)Programme approved by the IMF Executive Board on 11 March 2015. Further disbursements of IMFtranches depend on the continued implementation of Ukrainian government reforms, and other economic,legal and political factors. There remains a portion of sovereign debt, namely USD 3 billion of loan issuedby the Russian Federation, for which a restructuring has not been agreed to.

The banking system remains fragile due to its weak level of capital, low asset quality caused by theeconomic situation, currency depreciation, changing regulations and other factors. Based on the results ofstress-testing performed, the NBU has agreed with the owners of the largest commercial banks three-year plans for their recapitalisation, however not all banks are able to complete these programmes.During 2014-2016, over 80 banks were declared insolvent by the National Bank of Ukraine due to variousreasons and the largest private bank was nationalised in December 2016. Cleaning up of the commercialbanking system has created significant pressure on the State budget. During 2014–2016, the DepositGuarantee Fund repaid about UAH 74 billion to depositors of insolvent banks and over UAH 150 billionwere allocated to capitalisation of state-owned and nationalised banks.

The conflict in the parts of Eastern Ukraine which started in spring 2014 has not been resolved to date.However, there was no substantial escalation of the conflict since the signing of ceasefire agreements inFebruary 2015. The relationships between Ukraine and the Russian Federation remained strained.

On 15 March 2017, the National Security and Defence Council of Ukraine requested the NBU to imposesanctions against Ukrainian banks with Russian State capital. Impact of such decision is difficult topredict.

On 1 January 2016, the agreement on the free trade area between Ukraine and the EU came into force.Just after that the Russian government implemented a trading embargo on many key Ukrainian exportproducts. In response, the Ukrainian government implemented similar measures against Russianproducts.

The final resolution and the ongoing effects of the political and economic situation in Ukraine are difficultto predict but they may have further severe effects on the Ukrainian economy and the Bank’s business.

3 Summary of Significant Accounting Policies

Basis of preparation. These financial statements have been prepared in accordance with InternationalFinancial Reporting Standards (“IFRS”) under the historical cost convention, as modified by the initialrecognition of financial instruments based on fair value, and by the revaluation of available-for-salefinancial assets, and financial instruments at fair value through profit or loss. The principal accountingpolicies applied in the preparation of these financial statements are set out below. These policies havebeen consistently applied to all the periods presented, unless otherwise stated (refer to Note 5).

The preparation of financial statements in conformity with IFRS requires the use of estimates andassumptions. It also requires management to exercise its judgement in the process of applying the Bank’saccounting policies. The areas involving a higher degree of judgement or complexity, or areas whereassumptions and estimates are significant to the financial statements are disclosed in Note 4. Actualresults could differ from those estimates.

Going concern. Management prepared these consolidated financial statements on a going concernbasis. For the consideration of compliance with regulatory matters please refer to Note 25.

Financial instruments – key measurement terms. Depending on their classification, financialinstruments are carried at fair value, cost or amortised cost as described below.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date. The best evidence of fair value is pricein an active market. An active market is one in which transactions for the asset or liability take place withsufficient frequency and volume to provide pricing information on an ongoing basis.


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3 Summary of Significant Accounting Policies (Continued)

Fair value of financial instruments traded in an active market is measured as the product of the quotedprice for the individual asset or liability and the quantity held by the Bank. This is the case even if amarket’s normal daily trading volume is not sufficient to absorb the quantity held by the Bank and placingorders to sell the position in a single transaction might affect the quoted price. The price within the bid-askspread that is most representative of fair value in the circumstances was used to measure fair value,which management considers is the average of actual trading prices on the reporting date.

A portfolio of financial derivatives or other financial assets and liabilities that are not traded in an activemarket is measured at the fair value of a group of financial assets and financial liabilities on the basis ofthe price that would be received to sell a net long position (i.e. an asset) for a particular risk exposure orpaid to transfer a net short position (i.e. a liability) for a particular risk exposure in an orderly transactionbetween market participants at the measurement date. This is applicable for assets carried at fair valueon a recurring basis if the Bank: (a) manages the group of financial assets and financial liabilities on thebasis of the Bank’s net exposure to a particular market risk (or risks) or to the credit risk of a particularcounterparty in accordance with the entity’s documented risk management or investment strategy; (b) itprovides information on that basis about the group of assets and liabilities to the Bank’s key managementpersonnel; and (c) the market risks, including duration of the Bank’s exposure to a particular market risk(or risks) arising from the financial assets and financial liabilities is substantially the same.

Valuation techniques such as discounted cash flow models or models based on recent arm’s lengthtransactions or consideration of financial data of the investees, are used to measure fair value of certainfinancial instruments for which external market pricing information is not available. Valuation techniquesmay require assumptions not supported by observable market data. Disclosures are made in thesefinancial statements if changing any such assumptions to a reasonably possible alternative would result insignificantly different profit, income, total assets or total liabilities. Fair value measurements are analysedby level in the fair value hierarchy as follows: (i) level one are measurements at quoted prices(unadjusted) in active markets for identical assets or liabilities, (ii) level two measurements are valuationstechniques with all material inputs observable for the asset or liability, either directly (that is, as prices) orindirectly (that is, derived from prices), and (iii) level three measurements are valuations not based onobservable market data (that is, unobservable inputs).

Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposalof a financial instrument. An incremental cost is one that would not have been incurred if the transactionhad not taken place. Transaction costs include fees and commissions paid to agents (includingemployees acting as selling agents), advisors, brokers and dealers, levies by regulatory agencies andsecurities exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums ordiscounts, financing costs or internal administrative or holding costs.

Amortised cost is the amount at which the financial instrument was recognised at initial recognition lessany principal repayments, plus accrued interest, and for financial assets less any write-down for incurredimpairment losses. Accrued interest includes amortisation of transaction costs deferred at initialrecognition and of any premium or discount to maturity amount using the effective interest method.

Accrued interest income and accrued interest expense, including both accrued coupon and amortiseddiscount or premium (including fees deferred at origination, if any), are not presented separately and areincluded in the carrying values of related items in the statement of financial position.

The effective interest method is a method of allocating interest income or interest expense over therelevant period, so as to achieve a constant periodic rate of interest (effective interest rate) on thecarrying amount. The effective interest rate is the rate that exactly discounts estimated future cashpayments or receipts (excluding future credit losses) through the expected life of the financial instrumentor a shorter period, if appropriate, to the net carrying amount of the financial instrument. The effectiveinterest rate discounts cash flows of variable interest instruments to the next interest repricing date,except for the premium or discount which reflects the credit spread over the floating rate specified in theinstrument, or other variables that are not reset to market rates. Such premiums or discounts areamortised over the whole expected life of the instrument. The present value calculation includes all feespaid or received between parties to the contract that are an integral part of the effective interest rate.

Initial recognition of financial instruments. Derivatives and other financial instruments at fair valuethrough profit or loss are initially recorded at fair value. All other financial instruments are initially recordedat fair value plus transaction costs. Fair value at initial recognition is best evidenced by the transactionprice. A gain or loss on initial recognition is only recorded if there is a difference between fair value and


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transaction price which can be evidenced by other observable current market transactions in the sameinstrument or by a valuation technique whose inputs include only data from observable markets. Allpurchases and sales of financial assets that require delivery within the time frame established byregulation or market convention (“regular way” purchases and sales) are recorded at trade date, which isthe date on which the Bank commits to deliver a financial asset. All other purchases are recognised whenthe entity becomes a party to the contractual provisions of the instrument.

If the Bank revises its estimates in respect of expected payments and receipts from financial instrumentsdue to changes in the contractual terms, the carrying amounts of the financial instruments are adjusted toreflect actual and revised estimated cash flows. The Bank recalculates the carrying amounts of the financialinstruments by computing the present value of the estimated future cash flows at the financial instrumentoriginal effective interest rates or, where appropriate, at the revised effective interest rates. The adjustmentis recognised as interest income or expense.

The Bank uses discounted cash flow valuation techniques to determine the fair value of loans to relatedparties that are not traded in an active market. Differences may arise between the fair value at initialrecognition, which is considered to be the transaction price, and the amount determined at initialrecognition using the valuation technique. Any such differences are amortised over the term of the loansto related parties.

Derecognition of financial assets. The Bank derecognises financial assets when (a) the assets areredeemed or the rights to cash flows from the assets otherwise expired or (b) the Bank has transferredthe rights to the cash flows from the financial assets or entered into a qualifying pass-througharrangement while (i) also transferring substantially all risks and rewards of ownership of the assets or (ii)neither transferring nor retaining substantially all risks and rewards of ownership, but not retaining control.Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety toan unrelated third party without needing to impose restrictions on the sale.

Derecognition of financial liabilities. The Bank derecognises financial liability when it is extinguishedor when the obligation specified in the contract is discharged or cancelled or expires. An exchangebetween an existing borrower and lender of debt instruments with substantially different terms isaccounted for as an extinguishment of the original financial liability and the recognition of a new financialliability. Similarly, a substantial modification of the terms of an existing financial liability or a part of it isaccounted for as an extinguishment of the original financial liability and the recognition of a new financialliability.

Cash and cash equivalents. Cash and cash equivalents are items which are readily convertible toknown amounts of cash and which are subject to an insignificant risk of changes in value. Cash and cashequivalents include correspondent accounts with other banks and balances with the National Bank ofUkraine (the NBU), excluding the amount of mandatory reserves. Cash and cash equivalents are carriedat amortised cost.

Mandatory cash balances with the NBU. Mandatory cash balances with the NBU are carried atamortised cost and represent mandatory reserve deposits, which are not available to finance the Bank’sday to day operations, and hence are not considered as part of cash and cash equivalents for thepurposes of the statement of cash flows.

Due from other banks. Amounts due from other banks are recorded when the Bank advances money tocounterparty banks with no intention of trading the resulting unquoted non-derivative receivable due onfixed or determinable dates. Amounts due from other banks are carried at amortised cost.

Derivative financial instruments. Derivative financial instruments, including foreign exchange contracts,are carried at their fair value. All derivative instruments are carried as assets when fair value is positiveand as liabilities when fair value is negative. Changes in the fair value of derivative instruments areincluded in profit or loss for the year as gains less losses arising from derivative financial instruments. TheBank does not apply hedge accounting.

Loans and advances to customers. Loans and advances to customers are recorded when the Bankadvances money to purchase or originate an unquoted non-derivative receivable from a customer due onfixed or determinable dates, and has no intention of trading the receivable. Loans and advances tocustomers are carried at amortised cost.


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Impairment of financial assets carried at amortised cost. Impairment losses are recognised in profitor loss for the year when incurred as a result of one or more events (“loss events”) that occurred after theinitial recognition of the financial asset and which have an impact on the amount or timing of theestimated future cash flows of the financial asset or group of financial assets that can be reliablyestimated. If the Bank determines that no objective evidence exists that impairment was incurred for anindividually assessed financial asset, whether significant or not, it includes the asset in a group offinancial assets with similar credit risk characteristics, and collectively assesses them for impairment. Theprimary factors that the Bank considers in determining whether a financial asset is impaired are itsoverdue status and realisability of related collateral, if any.

The following other principal criteria are also used to determine whether there is objective evidence thatan impairment loss has occurred:

- any instalment is overdue and the late payment cannot be attributed to a delay caused by thesettlement systems;

- the borrower experiences a significant financial difficulty as evidenced by the borrower’s financialinformation that the Bank obtains;

- the borrower considers bankruptcy or a financial reorganisation;

- there is an adverse change in the payment status of the borrower as a result of changes in thenational or local economic conditions that impact the borrower; or

- the value of collateral significantly decreases as a result of deteriorating market conditions.

For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis ofsimilar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flowsfor groups of such assets by being indicative of the debtors’ ability to pay all amounts due according tothe contractual terms of the assets being evaluated.

Future cash flows in a group of financial assets that are collectively evaluated for impairment, areestimated on the basis of the contractual cash flows of the assets and the experience of management inrespect of the extent to which amounts will become overdue as a result of past loss events and thesuccess of recovery of overdue amounts. Past experience is adjusted on the basis of current observabledata to reflect the effects of current conditions that did not affect past periods, and to remove the effectsof past conditions that do not exist currently.

If the terms of an impaired financial asset held at amortised cost are renegotiated or otherwise modifiedbecause of financial difficulties of the borrower or issuer, impairment is measured using the originaleffective interest rate before the modification of terms. The renegotiated asset is then derecognised and anew asset is recognised at its fair value only if the risks and rewards of the asset substantially changed.This is normally evidenced by a substantial difference between the present values of the original cashflows and the new expected cash flows.

Impairment losses are always recognised through an allowance account to write down the asset’scarrying amount to the present value of expected cash flows (which exclude future credit losses that havenot been incurred) discounted at the original effective interest rate of the asset. The calculation of thepresent value of the estimated future cash flows of a collateralised financial asset reflects the cash flowsthat may result from foreclosure less costs for obtaining and selling the collateral, whether or notforeclosure is probable.

The effect of changes in exchange rates on the amount of the impairment provision is recognised aslosses or gains from impairment of assets.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be relatedobjectively to an event occurring after the impairment was recognised (such as an improvement in thedebtor’s credit rating), the previously recognised impairment loss is reversed by adjusting the allowanceaccount through profit or loss for the year.

Uncollectible assets are written off against the related impairment loss provision after all the necessaryprocedures to recover the asset have been completed and the amount of the loss has been determined.Subsequent recoveries of amounts previously written off are credited to impairment loss account in profitor loss for the year.


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Repossessed collateral. Repossessed collateral represents financial and non-financial assets acquiredby the Bank in settlement of overdue loans. The assets are initially recognised at fair value when acquiredand included in premises and equipment, other financial assets, investment properties or inventorieswithin other assets depending on their nature and the Bank's intention in respect of recovery of theseassets, and are subsequently remeasured and accounted for in accordance with the accounting policiesfor these categories of assets.

Credit related commitments. The Bank enters into credit related commitments, including letters of creditand financial guarantees. Financial guarantees represent irrevocable assurances to make payments inthe event that a customer cannot meet its obligations to third parties, and carry the same credit risk asloans. Financial guarantees and commitments to provide a loan are initially recognised at their fair value,which is normally evidenced by the amount of fees received. This amount is amortised on a straight linebasis over the life of the commitment, except for commitments to originate loans if it is probable that theBank will enter into a specific lending arrangement and does not expect to sell the resulting loan shortlyafter origination; such loan commitment fees are deferred and included in the carrying value of the loanon initial recognition. At the end of each reporting period, the commitments are measured at the higher of(i) the remaining unamortised balance of the amount at initial recognition and (ii) the best estimate ofexpenditure required to settle the commitment at the end of each reporting period. In cases where thefees are charged periodically in respect of an outstanding commitment, they are recognised as revenueon a time proportion basis over the respective commitment period.

Investment securities available for sale. This classification includes investment securities which theBank intends to hold for an indefinite period of time and which may be sold in response to needs forliquidity or changes in interest rates, exchange rates or equity prices. The Bank classifies investmentsecurities as available for sale at the time of purchase.

Investment securities available for sale are carried at fair value. Interest income on available-for-sale debtsecurities is calculated using the effective interest method, and recognised in profit or loss for the year.Dividends on available-for-sale equity instruments are recognised in profit or loss for the year when theBank’s right to receive payment is established and it is probable that the dividends will be collected. Allother elements of changes in the fair value are recognised in other comprehensive income until theinvestment is derecognised or impaired, at which time the cumulative gain or loss is reclassified fromother comprehensive income to profit or loss for the year. Impairment losses are recognised in profit orloss for the year when incurred as a result of one or more events (“loss events”) that occurred after theinitial recognition of investment securities available for sale. A significant or prolonged decline in the fairvalue of an equity security below its cost is an indicator that it is impaired. The cumulative impairment loss– measured as the difference between the acquisition cost and the current fair value, less any impairmentloss on that asset previously recognised in profit or loss – is reclassified from other comprehensiveincome to profit or loss for the year. Impairment losses on equity instruments are not reversed and anysubsequent gains are recognised in other comprehensive income. If, in a subsequent period, the fairvalue of a debt instrument classified as available for sale increases and the increase can be objectivelyrelated to an event occurring after the impairment loss was recognised in profit or loss, the impairmentloss is reversed through profit or loss for the year.

Premises and equipment. Premises and equipment are stated at cost less accumulated depreciationand provision for impairment, where required.

Costs of minor repairs and maintenance are expensed when incurred. Costs of replacing major parts orcomponents of premises and equipment items are capitalised, and the replaced part is retired.

At the end of each reporting period management assesses whether there is any indication of impairmentof premises and equipment. If any such indication exists, management estimates the recoverableamount, which is determined as the higher of an asset’s fair value less costs to sell and its value in use.The carrying amount is reduced to the recoverable amount and the impairment loss is recognised in profitor loss for the year. An impairment loss recognised for an asset in prior years is reversed if there hasbeen a change in the estimates used to determine the asset’s value in use or fair value less costs to sell.Gains and losses on disposals determined by comparing proceeds with carrying amount are recognisedin profit or loss for the year within other operating income or expenses.


11


Depreciation. Construction in progress is not depreciated. Depreciation on other items of premises andequipment is calculated using the straight-line method to allocate their cost to their residual values overtheir estimated useful lives:

Useful lives in yearsPremises 20Vehicles 5-10Office and computer equipment 1-10Leasehold improvements over the term of the underlying lease

The residual value of an asset is the estimated amount that the Bank would currently obtain from disposalof the asset less the estimated costs of disposal, if the asset were already of the age and in the conditionexpected at the end of its useful life. The assets’ residual values and useful lives are reviewed, andadjusted if appropriate, at the end of each reporting period.

Intangible assets. The Bank’s intangible assets have definite useful life and primarily include capitalisedcomputer software. Acquired computer software licences are capitalised on the basis of the costsincurred to acquire and bring to use the specific software. Development costs that are directly associatedwith identifiable and unique software controlled by the Bank are recorded as intangible assets if the inflowof incremental economic benefits exceeding costs is probable. Capitalised costs include staff costs of thesoftware development team and an appropriate portion of relevant overheads. All other costs associatedwith computer software, e.g. its maintenance, are expensed when incurred. Capitalised computersoftware is amortised on a straight line basis over expected useful lives of 2-10 years.

Operating leases. Where the Bank is a lessee in a lease which does not transfer substantially all therisks and rewards incidental to ownership from the lessor to the Bank, the total lease payments arecharged to profit or loss for the year (rental expense) on a straight-line basis over the period of the lease.

Leases embedded in other agreements are separated if (a) fulfilment of the arrangement is dependent onthe use of a specific asset or assets and (b) the arrangement conveys a right to use the asset.

When assets are leased out under an operating lease, the lease payments receivable are recognised asrental income on a straight-line basis over the lease term.

Due to other banks. Amounts due to other banks are recorded when money or other assets areadvanced to the Bank by counterparty banks. The non-derivative liability is carried at amortised cost. Ifthe Bank purchases its own debt, the liability is removed from the statement of financial position and thedifference between the carrying amount of the liability and the consideration paid is included in gains orlosses arising from retirement of debt.

Customer accounts. Customer accounts are non-derivative liabilities to individuals, state or corporatecustomers and are carried at amortised cost.

Other borrowed funds. Other borrowed funds include borrowings from banking and non-bankingfinancial institutions. Other borrowed funds are stated at amortised cost.

Subordinated debt. Subordinated debt represents long-term borrowing agreements that, in case of theBank’s default, would be secondary to the Bank’s primary debt obligations. Subordinated debt is carriedat amortised cost.

Income taxes. Income taxes have been provided for in the financial statements in accordance withlegislation enacted or substantively enacted by the end of the reporting period. The income tax charge orcredit comprises current tax and deferred tax and is recognised in profit or loss for the year, except if it isrecognised in other comprehensive income or directly in equity because it relates to transactions that arealso recognised, in the same or a different period, in other comprehensive income or directly in equity.


12


Current tax is the amount expected to be paid to, or recovered from, the taxation authorities in respect oftaxable profits or losses for the current and prior periods. Taxable profits or losses are based onestimates if financial statements are authorised prior to filing relevant tax returns. Taxes other than onincome are recorded within administrative and other operating expenses.

Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards andtemporary differences arising between the tax bases of assets and liabilities and their carrying amountsfor financial reporting purposes. In accordance with the initial recognition exemption, deferred taxes arenot recorded for temporary differences on initial recognition of an asset or a liability in a transaction otherthan a business combination if the transaction, when initially recorded, affects neither accounting nortaxable profit. Deferred tax balances are measured at tax rates enacted or substantively enacted at theend of the reporting period, which are expected to apply to the period when the temporary differences willreverse or the tax loss carry forwards will be utilised.

Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only tothe extent that it is probable that future taxable profit will be available against which the deductions can beutilised.

Uncertain tax positions. The Bank's uncertain tax positions are reassessed by management at the endof each reporting period. Liabilities are recorded for income tax positions that are determined bymanagement as more likely than not to result in additional taxes being levied if the positions were to bechallenged by the tax authorities. The assessment is based on the interpretation of tax laws that havebeen enacted or substantively enacted by the end of the reporting period, and any known court or otherrulings on such issues. Uncertain tax position and income tax sanctions (fines, penalties) are presentedas current income tax prepayments or liabilities, and related expenses are recorded in the statement ofprofit or loss and other comprehensive income in the income tax line.

Liabilities for penalties, interest and taxes other than on income are recognised based on management’sbest estimate of the expenditure required to settle the obligations at the end of the reporting period.

Provisions for liabilities and charges. Provisions for liabilities and charges are non-financial liabilities ofuncertain timing or amount. They are accrued when the Bank has a present legal or constructiveobligation as a result of past events, it is probable that an outflow of resources embodying economicbenefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation canbe made.

Trade and other payables. Trade payables are accrued when the counterparty has performed itsobligations under the contract and are carried at amortised cost.

Share capital. Ordinary shares are classified as equity. Incremental costs directly attributable to theissue of new shares are shown in equity as a deduction, net of tax, from the proceeds.

Dividends. Dividends are recorded in equity in the period in which they are declared. Any dividendsdeclared after the end of the reporting period and before the financial statements are authorised for issueare disclosed in the subsequent events note. Ukrainian legislation identifies the basis of distribution asretained earnings.

Income and expense recognition. Interest income and expense are recorded for all debt instruments onan accrual basis using the effective interest method. This method defers, as part of interest income orexpense, all fees paid or received between the parties to the contract that are an integral part of theeffective interest rate, transaction costs and all other premiums or discounts.


13


Fees integral to the effective interest rate include origination fees received or paid by the Bank relating tothe creation or acquisition of a financial asset or issuance of a financial liability, for example fees forevaluating creditworthiness, evaluating and recording guarantees or collateral, negotiating the terms ofthe instrument and for processing transaction documents. Commitment fees received by the Bank tooriginate loans at market interest rates are integral to the effective interest rate if it is probable that theBank will enter into a specific lending arrangement and does not expect to sell the resulting loan shortlyafter origination. The Bank does not designate loan commitments as financial liabilities at fair valuethrough profit or loss.

When loans and other debt instruments become doubtful of collection, they are written down to thepresent value of expected cash inflows and interest income is thereafter recorded for the unwinding of thepresent value discount based on the asset’s effective interest rate which was used to measure theimpairment loss.

All other fees, commissions and other income and expense items are generally recorded on an accrualbasis by reference to completion of the specific transaction assessed on the basis of the actual serviceprovided as a proportion of the total services to be provided.

Foreign currency translation. The functional currency of the Bank is the currency of the primaryeconomic environment in which the entity operates. The functional currency of the Bank and the Bank’spresentation currency is the national currency of Ukraine, Hryvnia (“UAH”).

Monetary assets and liabilities are translated into the Bank’s functional currency at the official exchangerate of the NBU at the end of the respective reporting period. Foreign exchange gains and lossesresulting from the settlement of transactions and from the translation of monetary assets and liabilitiesinto the Bank’s functional currency at year-end official exchange rates of the NBU, are recognised in profitor loss for the year (as foreign exchange translation gains less losses). Translation at year-end rates doesnot apply to non-monetary items that are measured at historical cost. Non-monetary items measured atfair value in a foreign currency, including equity investments, are translated using the exchange rates atthe date when the fair value was determined.

Effects of exchange rate changes on non-monetary items measured at fair value in a foreign currency arerecorded as part of the fair value gain or loss.

At 31 December 2016, the principal rates of exchange used for translating foreign currency balances asestablished by the NBU were UAH 27.190858 to USD 1 (2015: UAH 24.000667) and UAH 28.422604 toEUR 1 (2015: UAH 26.223129).

Offsetting. Financial assets and liabilities are offset and the net amount reported in the statement offinancial position only when there is a legally enforceable right to offset the recognised amounts, andthere is an intention to either settle on a net basis, or to realise the asset and settle the liabilitysimultaneously. Such a right of set off (a) must not be contingent on a future event and (b) must be legallyenforceable in all of the following circumstances: (i) in the normal course of business, (ii) the event ofdefault and (iii) the event of insolvency or bankruptcy.

Staff costs and related contributions. Wages, salaries, contributions to the Ukrainian state pension andsocial insurance funds, paid annual leave and sick leave, bonuses, and non-monetary benefits areaccrued in the year in which the associated services are rendered by the employees of the Bank.

The Bank has no legal or constructive obligation to make pension or similar benefit payments beyond thepayments to the statutory defined contribution scheme.

Presentation of statement of financial position in order of liquidity. The Bank does not have a clearlyidentifiable operating cycle and does not present current and non-current assets and liabilities in thestatement of financial position. Instead, assets and liabilities are presented in order of their liquidity. Thefollowing table provides information on amounts expected to be recovered or settled before and aftertwelve months after the reporting period.


14


31 December 2016 31 December 2015Amounts expected to be

recovered or settledAmounts expected to be

recovered or settled

In thousands of hryvnias

Within 12months afterthe reporting

period

After 12months afterthe reporting

period

Total Within 12months afterthe reporting

period

After 12months afterthe reporting

period

Total

ASSETSCash 662,450 - 662,450 396,221 - 396,221Balances with the NationalBank of Ukraine 291,375 - 291,375 270,256 - 270,256Due from other banks 1,120,909 - 1,120,909 1,526,197 - 1,526,197Loans and advances tocustomers

4,502,310 333,4064,835,716 3,201,466 512,343 3,713,809

Investment securities availablefor sale 632,403 - 632,403 561,493 44,566 606,059Premises, equipment andintangible assets - 69,578 69,578 - 38,504 38,504Other financial and non-financial assets 152,449 - 152,449 30,272 - 30,272

TOTAL ASSETS 7,361,896 402,984 7,764,880 5,985,905 595,413 6,581,318

LIABILITIESDue to other banks 724,671 127,901 852,572 1,491,727 - 1,491,727Current accounts 3,803,948 384,397 4,188,345 2,815,615 - 2,815,615Deposits 1,848,114 180,790 2,028,904 1,568,580 105,755 1,674,335Other borrowed funds 41,367 - 41,367 26,057 34,423 60,480Other financial and non-financial liabilities 41,005 - 41,005 29,604 - 29,604Current income tax liability 3,724 - 3,724 793 - 793Deferred income tax liability 48 - 48 - 2,134 2,134Subordinated debt 786 85,108 85,894 747 79,882 80,629

TOTAL LIABILITIES 6,463,663 778,196 7,241,859 5,933,123 222,194 6,155,317

4 Critical Accounting Estimates, and Judgements in Applying Accounting Policies

The Bank makes estimates and assumptions that affect the amounts recognised in the financialstatements, and the carrying amounts of assets and liabilities within the next financial year. Estimates andjudgements are continually reviewed and are based on management’s experience and other factors,including expectations of future events that are believed to be reasonable under the circumstances.Management also makes certain judgements, apart from those involving estimations, in the process ofapplying the accounting policies. Judgements that have the most significant effect on the amountsrecognised in the financial statements and estimates that can cause a significant adjustment to thecarrying amount of assets and liabilities within the next financial year include:

Impairment losses on loans and advances. The Bank applies the following approach towardsassessment of credit risk. The Bank regularly reviews its loan portfolios to assess impairment. Indetermining whether an impairment loss should be recorded in profit or loss for the year, the Bank makesjudgements as to whether there is any observable data indicating that there is a measurable decrease inthe estimated future cash flows from a portfolio of loans before the decrease can be identified with anindividual loan in that portfolio. This evidence includes observable data indicating that there has been anadverse change in the payment status of borrowers in a group, or national or local economic conditionsthat correlate with defaults on assets in the group. Management uses estimates based on historical lossexperience for assets with credit risk characteristics and objective evidence of impairment similar to thosein the portfolio when scheduling its future cash flows.


15

4 Critical Accounting Estimates, and Judgements in Applying Accounting Policies (Continued)

The methodology and assumptions used for estimating both the amount and timing of future cash flowsare reviewed regularly to reduce any differences between loss estimates and actual loss experience.

For all loans that are considered individually significant, the Bank assesses on a case-by-case basis ateach reporting date whether there is any objective evidence that the loan is impaired. For those loans,where the objective evidence of impairment exists, impairment losses are determined considering thefollowing factors:

- the viability of the customer’s business model and its capability to trade successfully despite offinancial difficulties and generate sufficient cash flow to service its debt obligations;

- the amount and timing of expected receipts and recoveries;

- the realisable value of security (or other credit enhancement) and likelihood of successfulrepossession.

The collective impairment is determined based on a statistical analysis of historical trends of default.Other historical data and current economic conditions are also evaluated when calculating the appropriatelevel of provision for impairment required for covering incurred loss.

Changes in loans collection estimates can affect the gross provision for loan impairment recognised. A10% increase in rates of portfolio provisions would result in an increase in the loan impairment provisionof UAH 183 thousand as at 31 December 2016 (2015: UAH 5,931 thousand). Impairment provisions forindividually significant loans are based on estimates of discounted future cash flows of the individualloans taking into account repayments and realization of any assets pledged as collateral for loans.Increase or decrease of actual future cash flows from individually significant loans by 10% due to possibledifferences in the amounts and timing of cash flows would lead to a decrease in impairment loss provisionof loans in the amount of UAH 42,041 thousand (as at 31 December 2015 - UAH 27,676 thousand) orincrease in impairment loss provision of loans in the amount of UAH 41,636 thousand (as at31 December 2015 - UAH 23,540 thousand), respectively.

Tax legislation. Ukrainian tax, currency and customs legislation is subject to varying interpretations.Refer to Note 27.

Initial recognition of related party transactions. In the normal course of business the Bank enters intotransactions with its related parties. IAS 39 requires initial recognition of financial instruments based ontheir fair values. Judgement is applied in determining if transactions are priced at market or non-marketinterest rates, where there is no active market for such transactions. The basis for judgement is pricing forsimilar types of transactions with unrelated parties and effective interest rate analysis. Terms andconditions of related party balances are disclosed in Note 30.

5 Adoption of New or Revised Standards and Interpretations

The following new standards and interpretations became effective for the Bank from 1 January 2016, butdid not have any material impact on the Bank:

Disclosure Initiative Amendments to IAS 1 (issued in December 2014 and effective forperiods beginning on or after 1 January 2016). The Standard was amended to clarify theconcept of materiality and explains that an entity need not provide a specific disclosure requiredby an IFRS if the information resulting from that disclosure is not material, even if the IFRScontains a list of specific requirements or describes them as minimum requirements. TheStandard also provides new guidance on presentation of subtotals in financial statements.

IFRS 14, Regulatory Deferral Accounts (issued in January 2014 and effective for annualperiods beginning on or after 1 January 2016).

Accounting for Acquisitions of Interests in Joint Operations – Amendments to IFRS 11(issued in May 2014 and effective for the periods beginning on or after 1 January 2016).

Clarification of Acceptable Methods of Depreciation and Amortisation – Amendments toIAS 16 and IAS 38 (issued in May 2014 and effective for the periods beginning on or after1 January 2016).


16

5 Adoption of New or Revised Standards and Interpretations (Continued)

Amendments to IAS 16 and IAS 41, Agriculture: Bearer Plants (issued in June 2014 andeffective for periods beginning 1 January 2016).

Equity Method in Separate Financial Statements – Amendments to IAS 27 (issued inAugust 2014 and effective for periods beginning 1 January 2016).

Sale or Contribution of Assets between an Investor and its Associate or Joint Venture –Amendments to IFRS 10 and IAS 28 (issued in September 2014 and effective for periodsbeginning on or after 1 January 2016).

Annual Improvements to IFRSs 2014 (issued in September 2014 and effective for annualperiods beginning on or after 1 January 2016).

Investment Entities: Applying the Consolidation Exception Amendment to IFRS 10, IFRS12 and IAS 28 (issued in December 2014 and effective for annual periods beginning on orafter 1 January 2016).

Investment Entities: Applying the Consolidation Exception Amendment to IFRS 10, IFRS12 and IAS 27 (issued in August 2014 and effective for annual periods beginning on 1 July2016).

6 New Accounting Pronouncements

Certain new standards and interpretations have been issued that are mandatory for the annual periodsbeginning on or after 1 January 2017 or later, and which the Bank has not early adopted.

IFRS 9 “Financial Instruments: Classification and Measurement” (amended in July 2015 andeffective for annual periods beginning on or after 1 January 2018). Key features of the new standardare:

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

Classification for debt instruments is driven by the entity’s business model for managing the financialassets 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 theSPPI requirement. Debt instruments that meet the SPPI requirement that are held in a portfoliowhere 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 (forexample, derivatives). Embedded derivatives are no longer separated from financial assets but willbe included in assessing the SPPI condition.

Investments in equity instruments are always measured at fair value. However, management canmake 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 infair value are presented in profit or loss.

Most of the requirements in IAS 39 for classification and measurement of financial liabilities werecarried forward unchanged to IFRS 9. The key change is that an entity will be required to present theeffects of changes in own credit risk of financial liabilities designated at fair value through profit orloss 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 offinancial assets since initial recognition. In practice, the new rules mean that entities will have torecord an immediate loss equal to the 12-month ECL on initial recognition of financial assets that arenot credit impaired (or lifetime ECL for trade receivables). Where there has been a significantincrease in credit risk, impairment is measured using lifetime ECL rather than 12-month ECL. Themodel includes operational simplifications for finance lease and trade receivables.


17

6 New Accounting Pronouncements (Continued)

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

The standard is expected to have a significant impact on the Bank’s loan impairment provisions. TheBank is currently assessing the impact of the new standard on its financial statements.

IFRS 15 "Revenue from Contracts with Customers" (issued on 28 May 2014 and effective for theperiods beginning on or after 1 January 2018). The new standard introduces the core principle thatrevenue must be recognised when the goods or services are transferred to the customer, at thetransaction price. Any bundled goods or services that are distinct must be separately recognised, and anydiscounts or rebates on the contract price must generally be allocated to the separate elements. Whenthe consideration varies for any reason, minimum amounts must be recognised if they are not atsignificant risk of reversal. Costs incurred to secure contracts with customers have to be capitalised andamortised over the period when the benefits of the contract are consumed. The Bank is currentlyassessing the impact of the new standard on its financial statements.

IFRS 16 "Leases" (issued in January 2016 and effective for annual periods beginning on or after1 January 2019). The new standard sets out the principles for the recognition, measurement,presentation and disclosure of leases. All leases result in the lessee obtaining the right to use an asset atthe start of the lease and, if lease payments are made over time, also obtaining financing. Accordingly,IFRS 16 eliminates the classification of leases as either operating leases or finance leases as is requiredby IAS 17 and, instead, introduces a single lessee accounting model. Lessees will be required torecognise: (a) assets and liabilities for all leases with a term of more than 12 months, unless theunderlying asset is of low value; and (b) depreciation of lease assets separately from interest on leaseliabilities in the income statement. IFRS 16 substantially carries forward the lessor accountingrequirements in IAS 17. Accordingly, a lessor continues to classify its leases as operating leases orfinance leases, and to account for those two types of leases differently. The Bank is currently assessingthe impact of the new standard on its financial statements.

Recognition of Deferred Tax Assets for Unrealised Losses – Amendments to IAS 12 (issued inJanuary 2016 and effective for annual periods beginning on or after 1 January 2017). Theamendment has clarified the requirements on recognition of deferred tax assets for unrealised losses ondebt instruments. The entity will have to recognise deferred tax asset for unrealised losses that arise as aresult of discounting cash flows of debt instruments at market interest rates, even if it expects to hold theinstrument to maturity and no tax will be payable upon collecting the principal amount. The economicbenefit embodied in the deferred tax asset arises from the ability of the holder of the debt instrument toachieve future gains (unwinding of the effects of discounting) without paying taxes on those gains. TheBank is currently assessing the impact of the amendments on its financial statements.

Disclosure Initiative – Amendments to IAS 7 (issued on 29 January 2016 and effective for annualperiods beginning on or after 1 January 2017). The amended IAS 7 will require disclosure of areconciliation of movements in liabilities arising from financing activities. The Bank is currently assessingthe impact of the amendment on its financial statements.

The following other new pronouncements are not expected to have any material impact on the Bankwhen adopted:

Sale or Contribution of Assets between an Investor and its Associate or Joint Venture - Amendmentsto IFRS 10 and IAS 28 (issued on 11 September 2014 and effective for annual periods beginning onor after a date to be determined by the IASB).

Recognition of Deferred Tax Assets for Unrealised Losses - Amendments to IAS 12 (issued on 19January 2016 and effective for annual periods beginning on or after 1 January 2017).

Amendments to IFRS 2, Share-based Payment (issued on 20 June 2016 and effective for annualperiods beginning on or after 1 January 2018).


18

6 New Accounting Pronouncements (Continued)

Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts - Amendments to IFRS 4(issued on 12 September 2016 and effective, depending on the approach, for annual periodsbeginning on or after 1 January 2018 for entities that choose to apply temporary exemption option, orwhen the entity first applies IFRS 9 for entities that choose to apply the overlay approach).

Unless otherwise described above, the new standards and interpretations are not expected to affectsignificantly the Bank’s financial statements.

7 Cash and Cash Equivalents

The Bank’s cash and cash equivalents for the purposes of statement of cash flows were as follows:

In thousands of hryvnias31 December

201631 December

2015

Cash 662,450 396,221

Balances with the National Bank of Ukraine (Note 8) 291,375 270,256Correspondent accounts with other banks (Note 9) 1,111,545 1,390,302

Less: mandatory reserves balances (Note 8) (127,860) (119,666)

Cash and cash equivalents for the purposes of cash flow statement 1,937,510 1,937,113

8 Balances with the National Bank of Ukraine

As at 31 December 2016, the mandatory reserve balance with the NBU is calculated on the basis of asimple average over a period used for calculation of the reserve base and should be maintained at thelevel of 3 to 6.5 per cent (2015: 3 to 6.5 per cent) of certain obligations of the Bank. As such, the balancecan vary from day-to-day.

The mandatory reserve requirement may be satisfied with balances on correspondent account with theNational Bank of Ukraine The Bank’s mandatory reserve balance with the NBU as at 31 December 2016was UAH 127,860 thousand (31 December 2015: UAH 119,666 thousand).

As the respective liquid assets are not freely available to finance the Bank’s day-to-day operations, for thepurposes of the cash flow statement, the mandatory reserve balance is excluded from cash and cashequivalents in the amount of UAH 127,860 thousand (31 December 2015: UAH 119,666 thousand).

9 Due from Other Banks


201631 December

2015

Correspondent accounts with other banks 1,111,607 1,390,364Term placements with other banks 9,364 135,895Less impairment provision (62) (62)

Total due from other banks 1,120,909 1,526,197


19

9 Due from Other Banks (Continued)

Amounts due from other banks are not collateralised. Analysis by credit quality of amounts due from otherbanks outstanding at 31 December 2016 is as follows:


Correspondentaccounts with other

banksTerm placements with

other banks Total

Neither past due nor impairedAA- to AA+ rated 698,066 - 698,066BB- to BBB+ rated 343,837 7,699 351,536Unrated 69,642 1,665 71,307

Total neither past due norimpaired 1,111,545 9,364 1,120,909

Individually determined to beimpaired (gross)

- past due over 360 days 62 - 62

Total individually impaired(gross) 62 - 62

Provision for impairment (62) - (62)

Total due from other banks 1,111,545 9,364 1,120,909

The credit ratings are based on Standard & Poor’s ratings where available, or Fitch’s and Moody’s ratingconverted to the nearest equivalent on the Standard & Poor’s rating scale.

Analysis by credit quality of amounts due from other banks outstanding at 31 December 2015 is asfollows:



banksTerm placements with

other banks Total

Neither past due nor impairedA- to A+ rated 2,038 - 2,038BB- to BBB+ rated 1,359,709 97,243 1,456,952CC- to CCC+ rated 15,904 240 16,144Unrated 12,651 38,412 51,063

Total neither past due norimpaired 1,390,302 135,895 1,526,197

Individually determined to beimpaired (gross)

- 91 to 180 days overdue 62 - 62

Total individually impaired(gross) 62 - 62

Provision for impairment (62) - (62)

Total due from other banks 1,390,302 135,895 1,526,197


20

9 Due from Other Banks (Continued)

Movements in the provision for impairment of due from other banks are as follows:

2016 2015



banks


banks

Provision for impairment at 1 January 62 -Provision for impairment during the year - 63Amounts written off during the year as uncollectible - (1)

Provision for impairment at 31 December 62 62

At 31 December 2016, the Bank had 5 counterparty banks (2015: 5 counterparty banks) with totalaggregated due from other banks balances of UAH 1,106,933 thousand (2015: UAH 1,505,192thousand), or 99% of the total due from other banks (2015: 99%).

Refer to Note 28 for the disclosure of the fair value of due from other banks. Interest rate analysis of duefrom other banks is disclosed in Note 25.

10 Loans and Advances to Customers

In thousands of hryvnias 31 December 2016 31 December 2015

Corporate loans 5,010,467 3,853,837

Retail loans:- card loans 11,908 9,861- consumer loans 8,984 6,877- mortgage loans 1,986 1,913- auto loans 1,280 778

Total loans and advances to customers before impairment 5,034,625 3,873,266

Less: Provision for loan impairment (198,909) (159,457)

Total loans and advances to customers 4,835,716 3,713,809


21

10 Loans and Advances to Customers (Continued)

Movements in the provision for loan impairment during 2016 are as follows:

In thousands of hryvniasCorporate

loansConsumer

loansCard

loansMortgage

loans Auto loans TotalProvision for loan impairmentat 1 January 2016 159,133 8 305 2 9 159,457

Provision / (recovery ofprovision) for impairment duringthe year 74,235 10 178 0 (8) 74,415Amounts written off during theyear as uncollectible (32,934) - (101) - - (33,035)Unwinding of discount onimpaired loans (1,928) - - - - (1,928)

Provision for loan impairmentat 31 December2016 198,506 18 382 2 1 198,909

Movements in the provision for loan impairment during 2015 are as follows:


loansConsumer

loansCard

loansMortgage

loans Auto loans TotalProvision for loan impairmentat 1 January 2015 29,435 141 238 49 51 29,914

Provision* / (recovery ofprovision) for impairment duringthe year 129,775 (133) 67 (47) (42) 129,620Amounts written off during theyear as uncollectible (77) - - - - (77)

Provision for loan impairmentat 31 December2015 159,133 8 305 2 9 159,457

*The provision for impairment during 2015 differs from the amount presented in the statement of profit orloss and other comprehensive income for the year due to recovery of amounts previously written off asuncollectible in the amount of UAH 2,993 thousand. The amount of the recovery was credited directly tothe provisions line in the statement of profit or loss and other comprehensive income for the year.


22


Economic sector risk concentrations within the customer loan portfolio are as follows:

In thousands of hryvnias 31 December 2016 31 December 2015Amount % Amount %

Trade 2,737,247 54 1,752,308 45Agriculture and food 735,862 14 606,116 15Manufacturing 491,245 10 408,919 11Construction and real estateoperations 487,516 9 388,279 10

Transport and communication 353,161 7 466,597 12Financial and investment operations 129,163 3 126,615 3Retail loans 24,158 1 19,429 1Other services 76,273 2 105,003 3

Total loans and advances tocustomers (before impairment) 5,034,625 100 3,873,266 100

At 31 December 2016, the Bank had top 10 borrowers (2015: 10 borrowers) with the total aggregateamount of UAH 1,694,557 thousand (2015: UAH 1,520,029 thousand) or 34% of the gross loan portfolio(2015: 39%). At the same time, exposures of top 10 borrowers were partly covered by the deposits incollateral in the total amount of UAH 729,658 thousand as at 31 December 2016 (2015: UAH 522,906thousand).

Information about collateral at 31 December 2016 is as follows:

In thousands of hryvnias Corporateloans

Consumerloans

Cardloans

Mortgageloans

Autoloans

Total

Unsecured loans 532,153 1,651 11,671 - 10 545,485Loans collateralised by:- residential real estate 90,263 5,038 - 1,986 - 97,287- other real estate 1,653,404 828 - - - 1,654,232- cash deposits (Note 15) 1,055,277 1,467 237 - - 1,056,981- other assets 1,679,370 - - - 1,270 1,680,640

Total loans and advances tocustomers 5,010,467 8,984 11,908 1,986 1,280 5,034,625

The disclosure above represents the lower of the carrying value of the loan or collateral taken; theremaining part is disclosed within the unsecured exposures. The carrying value of loans was allocatedbased on liquidity of the assets taken as collateral.

Fair value of property pledged as collateral during the reporting period was assessed by independentexperts – professional appraisers. “Other assets” category includes goods in turnover, other tangibleassets and property rights.


23


Information about collateral at 31 December 2015 is as follows:

In thousands of hryvnias Corporateloans

Consumerloans

Cardloans

Mortgageloans

Auto loans Total

Unsecured loans 638,822 1,950 9,725 - 26 650,523Loans collateralised by:- residential real estate 49,872 3,895 - 1,913 157 55,837- other real estate 1,169,001 666 - - - 1,169,667- cash deposits (Note 15) 728,620 20 136 - - 728,776- other assets 1,267,522 346 - - 595 1,268,463

Total loans and advances tocustomers 3,853,837 6,877 9,861 1,913 778 3,873,266

The Bank applied the portfolio provisioning methodology prescribed by IAS 39, Financial Instruments:Recognition and Measurement, and created portfolio provisions for impairment losses that were incurredbut have not been specifically identified with any individual loan by the balance sheet date.

The Bank’s policy is to classify each loan as ‘neither past due nor impaired’ until specific objectiveevidence of impairment of the loan is identified. The impairment provisions may exceed the total grossamount of individually impaired loans as a result of this policy and the portfolio impairment methodology.

The Bank regularly assesses the credit quality in order to define the potential sign of impairment,including applying professional judgement. The sign of impairment is considered to be one or several lossevents which occurred after the initial recognition of the financial asset, with negative impact on theamount and terms of initially expected future cash flows. The primary factors that the Bank considers indetermining whether a loan is impaired are its overdue status and realisability of related collateral, if any.As a result, the Bank presents below an ageing analysis of loans that are individually determined to beimpaired.

Past due, but not impaired, loans primarily include collateralised loans where the fair value of collateralcovers the overdue interest and principal repayments. The amount reported as past due but not impairedis the whole balance of such loans, not only the individual instalments that are past due.


24


Analysis by credit quality of loans outstanding at 31 December 2016 is as follows:


loansConsumer

loansCard

loansMortgage

loansAuto

loans Total

Neither past due nor impaired- Loans to business entities withinsignificant sensitivity to foreigncurrency exposure 2,788,366 - - - - 2,788,366

- Loans to business entities withsignificant sensitivity to foreigncurrency exposure 1,614,384 - - - - 1,614,384

- Loans to private individuals withinsignificant sensitivity to foreigncurrency exposure - 8,922 11,421 1,986 1,280 23,609

Total neither past due norimpaired 4,402,750 8,922 11,421 1,986 1,280 4,426,359

Past due but not impaired- past due less than 31 day - 62 110 - - 172- past due from 31 to 90 days 101 - 69 - - 170

Total past due but not impaired 101 62 179 - - 342

Loans individually determined asimpaired- not past due 109,507 - - - - 109,507- past due from 31 to 90 days 126,379 - - - - 126,379- past due from 91 to 180 days - - 57 - - 57- past due from 181 to 360 days 361,712 - 72 - - 361,784- past due over 360 days 10,018 - 179 - - 10,197

Total loans individuallydetermined as impaired 607,616 - 308 - - 607,924


Less impairment provisions (198,506) (18) (382) (2) (1) (198,909)



25


Analysis by credit quality of loans outstanding at 31 December 2015 is as follows:


loansConsumer

loansCard

loansMortgage

loansAuto

loans Total

Neither past due nor impaired- Loans to business entities withinsignificant sensitivity to foreigncurrency exposure 2,142,870 - - - - 2,142,870

- Loans to business entities withsignificant sensitivity to foreigncurrency exposure 1,199,607 - - - - 1,199,607

- Loans to private individuals withinsignificant sensitivity to foreigncurrency exposure - 6,867 9,526 1,913 723 19,029

Total neither past due norimpaired 3,342,477 6,867 9,526 1,913 723 3,361,506

Past due but not impaired- past due less than 31 day 23,758 10 31 - 55 23,854- past due from 31 to 90 days 94,449 - 44 - - 94,493- past due from 91 to 180 days - - 80 - - 80- past due from 181 to 360 days - - 123 - - 123- past due over 360 days - - 57 - - 57

Total past due but not impaired 118,207 10 335 - 55 118,607

Loans individually determined asimpaired- past due less than 31 day 61,503 - - - - 61,503- past due from 31 to 90 days 285,270 - - - - 285,270- past due from 181 to 360 days 41,961 - - - - 41,961- past due over 360 days 4,419 - - - - 4,419

Total loans individuallydetermined as impaired 393,153 - - - - 393,153


Less impairment provisions (159,133) (8) (305) (2) (9) (159,457)



26


The financial effect of collateral is presented by disclosing collateral values separately for (i) those assetswhere collateral and other credit enhancements are equal to or exceed carrying value of the asset (“over-collateralised assets”) and (ii) those assets where collateral and other credit enhancements are less thanthe carrying value of the asset (“under-collateralised assets”).

The effect of collateral at 31 December 2016:

Over-collateralised assets Under-collateralised assets

In thousands of hryvniasGross exposure

of loansFair value of

collateralGross exposure


collateral

Corporate loans 3,705,767 7,327,271 1,304,700 772,547

Retail loansconsumer loans 7,272 22,250 1,712 60- card loans 237 404 11,671 -- mortgage loans 1,986 9,498 - -- auto loans 1,270 2,047 10 -

Total 3,716,532 7,361,470 1,318,093 772,607

The effect of collateral at 31 December 2015:

Over-collateralised assets Under-collateralised assets

In thousands of hryvniasGross exposure


collateralGross exposure


collateral

Corporate loans 2,577,477 5,519,561 1,276,360 637,538

Retail loansconsumer loans 4,869 19,299 2,008 59- card loans 136 389 9,725 -- mortgage loans 1,913 10,429 - -- auto loans 751 1,914 27 -

Total 2,585,146 5,551,592 1,288,120 637,597

The fair value of collateral is the price that would be received to sell an asset in an orderly transactionbetween market participants at the measurement date. This amount excludes potential expensesassociated with collection of debt through foreclosure of collateral, and the time value of money inherentin discounting expected cash flows from sale of collateral. Net value of collateral after litigation costs,selling expenses and other costs from collection of debt through foreclosure of collateral may differ fromits fair value.

Fair values of real estate properties were estimated by management based on market prices for similarassets adjusted, where appropriate, for differences in location, quality and other relevant characteristics.

Refer to Note 28 for the estimated fair value of each class of loans and advances to customers. Interestrate analysis of loans and advances to customers is disclosed in Note 25. The information on relatedparty balances is disclosed in Note 30.


27

11 Investment Securities Available for Sale

In thousands of hryvnias 2016 2015

Ukrainian government bonds 272 340Deposit certificates issued by the NBU 632,131 561,153

Total debt securities 632,403 561,493

Registered ordinary shares of PrJSC "IC "ARSENAL" - 44,566

Total investment securities available for sale 632,403 606,059

As at 31 December 2016, investment securities available for sale include Ukrainian government bondwith maturity of 22 July 2019 and nominal yield of 9.5% p.a.; deposit certificates issued by the NBU withthe maturity on 4 January 2017 and nominal interest rate of 14.00%, deposit certificates issued by theNBU with the maturity on 5 January 2017 and nominal interest rate of 14.00%, deposit certificates issuedby the NBU with the maturity on 6 January 2017 and nominal interest rate of 14.00%, and depositcertificates issued by the NBU with the maturity on 10 January 2017 and nominal interest rate of 14.00%.

During 2016, the Bank disposed of its investment in shares of PrJSC "IC "ARSENAL", previously carriedat cost in the amount of UAH 44,566 thousand. The shares of the investee were not publicly traded orquoted, and recent trade prices were not publicly accessible. The Bank recorded gain on disposal ofUAH 89 thousand in other operating income in the statement of profit or loss and other comprehensiveincome for the year.

Analysis by credit quality of debt securities outstanding at 31 December 2016 is as follows:

In thousands of hryvniasUkrainian government

bonds

Depositcertificates issued by

the NBU Total

Neither past due nor impairedHigh quality securities 272 632,131 632,403

Total neither past due nor impaired 272 632,131 632,403

Total debt securities available for sale 272 632,131 632,403


28

11 Investment Securities Available for Sale (Continued)

Analysis by credit quality of debt securities outstanding at 31 December 2015 is as follows:

In thousands of hryvniasUkrainian government

bonds

Depositcertificates issued by

the NBU Total

Neither past due nor impairedHigh quality securities 340 561,153 561,493

Total neither past due nor impaired 340 561,153 561,493

Total debt securities available for sale 340 561,153 561,493

The debt securities are not collateralised.

The movements in investment securities available for sale are as follows:

In thousands of hryvnias Note 2016 2015

Carrying amount at 1 January 606,059 395Interest income accrued 20 135,045 68,523Interest income received (137,292) (63,889)Purchases 46,305,000 63,392,567Redemption and disposal of investment securities available for

sale (46,276,636) (62,791,192)Revaluation at fair value 227 (345)

Carrying amount at 31 December 632,403 606,059

Interest rate analysis of investment securities available for sale is disclosed in Note 25. Refer to Note 28for the disclosure of the fair value of investment securities available for sale.


29

12 Premises, Equipment and Intangible Assets

In thousandsof hryvnias Note

Premi-ses

Lease-hold

impro-ve-

mentsVehic-

les

Office andcomputer

equipment

Const-ruction

inprog-ress

Totalpremises

andequip-

ment

Intan-gible

assets Total

Cost at 1 January 2015 2,063 6,297 4,819 48,185 929 62,293 6,258 68,551Accumulateddepreciation (267) (5,260) (1,693) (24,360) - (31,580) (4,525) (36,105)

Carrying amount at 1January 2015 1,796 1,037 3,126 23,825 929 30,713 1,733 32,446

Additions - 16 3,130 12,807 - 15,953 4,688 20,641Transfers - - - 204 (204) - - -Disposals (836) - - (102) (143) (1,081) - (1,081)Depreciation charge 23 (123) (866) (1,183) (10,261) - (12,433) (1,069) (13,502)

Carrying amount at31 December 2015 837 187 5,073 26,473 582 33,152 5,352 38,504

Cost at 31 December2015 1,032 3,542 7,949 61,016 582 74,121 10,946 85,067

Accumulateddepreciation (195) (3,355) (2,876) (34,543) - (40,969) (5,594) (46,563)

Carrying amount at31 December 2015 837 187 5,073 26,473 582 33,152 5,352 38,504

Additions - 15,969 927 19,587 6,470 42,953 12,446 55,399Disposals (832) - - (688) - (1,520) - (1,520)Depreciation charge 23 (5) (3,816) (1,619) (14,603) - (20,043) (2,762) (22,805)

Carrying amount at31 December 2016 - 12,340 4,381 30,769 7,052 54,542 15,036 69,578

Cost at 31 December2016 - 19,148 8,876 79,272 7,052 114,348 23,392 137,740Accumulateddepreciation - (6,808) (4,495) (48,503) - (59,806) (8,356) (68,162)

Carrying amount at31 December 2016 - 12,340 4,381 30,769 7,052 54,542 15,036 69,578

Construction in progress consists mainly of construction and refurbishment of branch premises andequipment. Upon completion, assets are transferred to premises and equipment.


30

13 Other Financial and Non-Financial Assets


Other financial assetsRestricted cash 121,801 -Accounts receivable on other financial instruments 1,847 12,000Other financial assets 147 212

Total other financial assets 123,795 12,212

Other non-financial assetsDeferred expenses 12,910 12,493Accounts receivable on assets purchased 7,951 748Repossessed collateral 3,975 2,473Other assets 3,818 2,346

Total other non-financial assets 28,654 18,060

Total other financial and non-financial assets 152,449 30,272

Restricted cash comprises guarantee cover placed by the Bank within payment systems Visa and MasterCard. This cash is neither available to finance the Bank’s day to day operations nor returnable ondemand. Refer to Note 27.

Refer to Note 28 for the disclosure of the fair value of other financial assets.

Repossessed collateral comprises real estate properties and land. The Bank intends to dispose of theseassets in the foreseeable future. These assets do not meet the definition of non-current assets held forsale and are classified as inventories in accordance with IAS 2 Inventories. These assets were initiallyrecognised at fair value at acquisition.

All the above assets are expected to be recovered within more than twelve months after the year-end.

14 Due to Other Banks


Correspondent accounts and overnight placements of other banks 236,735 309,205Short-term loans received 487,913 1,064,438Long-term deposits 127,924 118,084

Total due to other banks 852,572 1,491,727

As at 31 December 2016, the largest exposure of correspondent accounts of other banks related to anon-resident bank and comprised UAH 231,070 thousand, that represented 97.61% of the totalcorrespondent accounts and overnight deposits of other banks (2015: UAH 308,824 thousand, thatrepresented 99.88% of the total correspondent accounts and overnight deposits of other banks).

As at 31 December 2016, the largest exposure of short-term loans received from other banks related to anon-resident bank and comprised UAH 485,193 thousand, that represented 99.44% of the total short-term loans received from other banks (2015: UAH 707,795 thousand, that represented 66.49% of the totalshort-term loans received from other banks).

As at 31 December 2016 due to other banks represented by a long-term deposit from a non-residentbank totalled UAH 127,924 thousand at the rate 6.4% in EUR (2015: UAH 118,084 thousand).

The fair value of each class of due to other banks is disclosed in Note 28. Interest rate analysis of due toother banks is disclosed in Note 25. The information on related party balances is disclosed in Note 30.


31

15 Current Accounts and Deposits


Current accounts- Current accounts of legal entities 2,915,762 1,720,104- Current accounts of individuals 1,272,583 1,095,511

Total current accounts 4,188,345 2,815,615

Deposits- Deposits of legal entities 762,109 781,039- Deposits of individuals 1,261,594 893,296- Deposit certificates issued 5,201 -

Total deposits 2,028,904 1,674,335

Total current accounts and deposits 6,217,249 4,489,950

As at 31 December 2016, current account balances include demand deposits totalling UAH 890,084thousand (2015: UAH 813,646 thousand), of which UAH 821,234 thousand relate to individuals (2015:UAH 772,325 thousand) and UAH 68,850 thousand relate to legal entities (2015: UAH 41,321 thousand).These deposits carry interest rates ranging from 0.01% to 19% p.a. depending on remaining balance ofaccount.

At 31 December 2016, the current accounts of the 10 largest customers of the Bank comprisedUAH 1,350,029 thousand (2015: UAH 954,416 thousand) or 32.20 % (2015: 33.90%) of total currentaccounts.

At 31 December 2016, the deposits of the 10 largest customers of the Bank comprisedUAH 1,058,091 thousand (2015: UAH 907,786 thousand) or 52.3% (2015: 54.2%) of total deposits.

As at 31 December 2016, customer accounts include balances totalling UAH 1,070,953 thousand(2015: UAH 765,422 thousand) placed by customers as collateral for loans to customers totallingUAH 1,056,981 thousand (2015: UAH 728,776 thousand). Refer to Note 10.

Economic sector risk concentrations within the current accounts are as follows:

In thousands of hryvnias31 December 2016 31 December 2015

Amount % Amount %

Individuals 1,272,583 30 1,095,511 39Transportation, telecommunication 1,080,932 26 672,624 24Trade 775,106 19 551,935 20Professional services 392,561 9 72,670 3Processing 228,380 5 200,645 7Agriculture 161,787 4 19,872 1Construction 122,595 3 68,286 2Financial intermediaries 93,192 2 62,882 2Other 61,209 2 71,190 2

Total current accounts 4,188,345 100 2,815,615 100


32

15 Current Accounts and Deposits (Continued)

Economic sector risk concentrations within the deposits are as follows:

In thousands of hryvnias31 December 2016 31 December 2015

Amount % Amount %

Individuals 1,266,795 62 893,296 54Trade 440,314 22 122,093 7Transportation, telecommunication 139,969 7 320,353 19Agriculture, forestry and fishery 120,677 6 68,069 4Professional services 29,338 1 140,467 8Processing 18,408 1 9,304 1Other 13,403 1 120,753 7

Total deposits 2,028,904 100 1,674,335 100

Refer to Note 28 for the disclosure of the fair value of each class of customer accounts. Interest rateanalysis of customer accounts is disclosed in Note 25. The information on related party balances isdisclosed in Note 30.

16 Other Borrowed Funds

In February 2015, the Bank obtained a long-term loan for development of small and medium businessesof USD 2,500 thousand under the agreement with Black Sea Trade and Development Bank signed inDecember 2014. The carrying value of this loan as at 31 December 2016 is UAH 41,367 thousand (2015:UAH 60,480 thousand). The loan is repayable in 5 (five) equal semi-annual instalments, starting from thesecond six-month period of the Loan. The final contractual maturity date of this loan is 6 February 2018.During 2016, the Bank repaid USD 1,000 of the outstanding loan from BSTDB according to thecontractual repayment schedule. In addition, as disclosed in Notes 25 and 27 the Bank breached certaincovenants in respect of this loan, which may result in the creditor's call on early repayment on this loan.

The contractual interest rate is based on 6-month USD LIBOR rate plus margin of 6% (2015: 6-monthUSD LIBOR rate plus margin of 8%). As at the end of 2016, the interest rate amounted to 7.1582 percentper annum (2015: 6.48585 percent per annum). Interest is payable on a semi-annual basis over the life ofthe loan agreement.

Refer to Note 28 for the disclosure of the fair value of other borrowed funds.


33

17 Other Financial and Non-Financial Liabilities


201631 December

2015

Settlements with customers 2,854 3,357Accounts payable on transfers 1,236 -Accounts payable on assets purchased 1,236 -Deferred income 641 2,488Other financial liabilities 1,153 516

Total other financial liabilities 7,120 6,361

Accrued expenses on services 11,674 6,524Accrued employee benefit costs 10,693 8,293Amounts payable to Individuals’ Deposits Guarantee Fund 6,068 4,576Taxes payable other than on income 3,686 3,213Other accruals 1,764 637

Total other liabilities 33,885 23,243

Total other financial and non-financial liabilities 41,005 29,604

18 Subordinated Debt

In October 2012, the Bank obtained subordinated debt of USD 2,000 thousand originally maturing inOctober 2017. In October 2014 its maturity was further extended to October 2019 and in November 2016it was further extended to November 2021. The subordinated debt was obtained from an individual who isa related party to the Bank. Furthermore, in November 2014 the Bank obtained subordinated debt of UAH35,000 maturing in November 2019 from a legal entity which is a related party to the Bank.

The total carrying value of the subordinated debt as at 31 December 2016 is UAH 85,894 thousand(31 December 2015: UAH 80,629 thousand). The subordinated debt carries an interest rate of 8% perannum for subordinated debt denominated in USD and 16.5% per annum for subordinated debtdenominated in UAH and payable monthly. According to management estimates, the interest rate undersimilar contracts in USD at initial recognition was 10.5%. Gain on extension of the originally contractedmaturity of USD-denominated debt was recognised in equity in 2016 in the amount of UAH 1,446thousand. Refer to Notes 29 and 30.

19 Share Capital

In thousands of Ukrainian hryvnias except for number ofshares

Number of outstandingshares

Amount

At 1 January 2015 3,073,500 307,350

At 31 December 2015 3,073,500 307,350

At 31 December 2016 3,073,500 307,350

All shares are ordinary shares, with the nominal value of UAH 100 per share (2015: UAH 100 per share).Each ordinary share carries one vote. All shares are authorised, issued and fully paid, with the equalvoting, dividend and capital repayment rights.


34

19 Share Capital (Continued)

In accordance with Ukrainian legislation, the Bank distributes profits as dividends or transfers them toreserves on the basis of financial information prepared in accordance with the National Bank of Ukraineregulations (2015: in accordance with the NBU regulations).

No dividends to ordinary shareholders were declared during 2016 (2015: the Bank declared and paiddividends to ordinary shareholders of UAH 19,461 thousand).

The statutory reserve fund in equity accounted for in accordance with the NBU regulations comprisesUAH 7,925 thousand as at 31 December 2016 (31 December 2015: UAH 5,447 thousand). Transfers toreserve fund are made from the net profit for the year retained by the bank after paying taxes and othermandatory payments and must be at least 5 percent of the net profit of the Bank. The reserve fund canonly be used to cover losses of the Bank for the reporting year in accordance with the decision of theSupervisory Board and in an order that is established by the general meeting of its members.

20 Interest Income and Expense


Interest incomeLoans and advances to legal entities 658,080 580,655Debt securities available for sale 135,045 68,523Loans and advances to individuals 5,212 5,201Due from other banks 3,232 31,317

Total interest income 801,569 685,696

Interest expenseCurrent/settlement accounts 200,055 163,043Term deposits of individuals 110,969 104,816Due to other banks 78,739 110,976Term deposits of legal entities 36,285 26,176Subordinated debt 10,635 10,053Other borrowed funds 4,426 12,832

Total interest expense 441,109 427,896

Net interest income 360,460 257,800

Interest income on impaired loans amounts to UAH 47,812 thousand (2015: UAH 618 thousand).

Interest expenses on demand deposits which are accounted on current/settlements accounts amount toUAH 69,753 thousand (2015: UAH 55,955 thousand).


35

21 Fee and Commission Income and Expense


Fee and commission income- Cash and settlement transactions 134,016 76,393- Purchase and sale of foreign currency 44,444 34,018- Guarantees issued 11,508 9,835- Cash collection 3,800 2,551- Other 3,483 1,765

Total fee and commission income 197,251 124,562

Fee and commission expense- Settlement transactions 55,620 31,573- Payment processing 11,469 2,055- Other 965 1,241

Total fee and commission expense 68,054 34,869

Net fee and commission income 129,197 89,693

22 Other Operating Income


Income from MasterCard on implementation of a joint marketingprogramme 20,007 13,598

Gain on changes in terms of financial instrument agreements 2,019 456Penalties received 676 1,271Other 303 1,203

Total other operating income 23,005 16,528

In 2016, the Bank received income of UAH 20,007 thousand (2015: UAH 13,598 thousand) from theMasterCard payment system under the joint programme on distribution of its payment cards.


36

23 Administrative and Other Operating expenses

In thousands of hryvnias Note 2016 2015

Staff costs 153,356 116,399Operating lease expense for premises and equipment 37,024 27,448Royalty 33,717 21,703Communication and computer expenses 28,096 18,663Contributions to Individuals Deposits Guarantee Fund 23,147 17,672Depreciation of premises and equipment and amortisation ofsoftware and other intangible assets 12 22,805 13,502Maintenance costs of premises and equipment 22,385 15,232Advertising and marketing services 10,618 1,015Voluntary insurance of loans 5,220 13,255Taxes and charges, other than income tax 4,135 2,869Security services 3,969 3,170Utilities 3,882 2,660Travel expenses 3,276 2,632Professional services 3,138 3,868Other 13,435 15,294

Total administrative and other operating expenses 368,203 275,382

The unified social contribution is included in staff costs in the amount of UAH 20,804 thousand (2015:UAH 26,553 thousand).

Royalty represents monthly payments for using the trade mark “Vlasniy Rakhunok” to a related party –entity under control of significant shareholders (Note 30) in the total amount of UAH 30,596 thousand(2015: UAH 21,703 thousand).

24 Income Taxes

(a) Components of income tax expense

Income tax expense recorded in profit or loss for the year comprises the following:


Current tax 23,658 13,118Deferred tax (2,127) 5,503

Income tax expense for the year 21,531 18,621

In 2016, monthly advance payments of income tax were cancelled and instead, one-off advance paymentwas introduced at the level of 2/9 of the income tax amount recorded in tax accounts for three quarters2016 (2015: advance payments of income tax were used).


37

24 Income Taxes (Continued)

(b) Reconciliation between the tax expense and profit or loss multiplied by applicable tax rate

The income tax rate applicable to the Bank’s 2016 income was 18% (2015: 18%) A reconciliationbetween the expected and the actual taxation charge is provided below.


Profit before tax 116,919 68,188

Theoretical tax charge at statutory rate 21,045 12,274

Tax effect of items which are not deductible or assessable for taxationpurposes:- Non-deductible expenses 510 389Expenses not recognised in financial accounting (42) (415)Changes in tax base - 5,504Other permanent differences 18 -

Income tax expense for the year 21,531 18,621

In 2016, the Ukrainian Parliament adopted amendments to the Tax Code. The tax rate applicable to 2017is remaining unchanged at 18% (2015 and 2016: 18%).

Tax effect of Transitional Provisions of the Tax Code represents the following: 1) the positive differencebetween the impairment provision as at 31 December 2014 recorded by the Bank in accordance with theNBU Regulation No 23 dated 25 January 2012 and the impairment provision under IFRS increases profitor loss before tax in equal parts over a three-year period (for the year ended 31 December 2016, theBank recorded UAH 7,842 thousand of increase in taxable profit with the related tax effect of UAH 1,411thousand); 2) deductible expenses include employee vacations and other payroll costs recovered after1 January 2015 against reserves and provisions recorded under Ukrainian GAAP or IFRS before1 January 2015, unless these costs were taken into account in estimating the tax base before 1 January2015 (for the year ended 31 December 2016, the Bank deducted UAH 1,341 thousand of such costs withthe related tax effect of UAH 241 thousand).

The difference relating to change in tax base emerged in 2014 as a loss from restructuring of loans andwas recorded in accounting according to IFRS and was not included in the tax base in accordance withthe requirements of the Tax Code of Ukraine. In 2015, the Parliament of Ukraine adopted amendments tothe Tax Code, according to which the tax base as of 31 December 2015 is equivalent to IFRS. Also theTax Code does not provide specific transitional provisions to reflect the tax difference on this transactionas of 31 December 2014.

(c) Deferred taxes analysed by type of temporary difference

Differences between IFRS and statutory taxation regulations in Ukraine give rise to temporary differencesbetween the carrying amount of assets and liabilities for financial reporting purposes and their tax bases.The tax effect of the movements in these temporary differences is detailed below, and is recorded at therate of 18% (2015: 18%).


38

24 Income Taxes (Continued)

In thousands of hryvnias 1 January 2016

Credited/(charged) to

profit or lossCharged directly

to equity31 December

2016

Tax effect of deductible/(taxable) temporarydifferences

Provision for loan impairment (2,823) 1,411 - (1,412)Premises and equipment 232 957 - 1,189Accruals 393 (241) - 152Other 64 - (41) 23

Net deferred tax asset/(liability) (2,134) 2,127 (41) (48)

Recognised deferred tax asset 689 716 (41) 1,364Recognised deferred tax liability (2,823) 1,411 - (1,412)

Net deferred tax asset/(liability) (2,134) 2,127 (41) (48)

The tax effect of the movements in temporary differences during the year ended 31 December 2015 isdetailed below.

In thousands of hryvnias 1 January 2015

Credited/(charged) to

profit or lossCharged directly

to equity31 December

2015

Tax effect of deductible/(taxable) temporarydifferences

Loan restructuring adjustment 5,413 (5,413) - -Adjustment resulting from changes in terms offinancial instrument agreements 1,067 (1,067) - -

Provision for loan impairment (3,381) 558 - (2,823)Premises and equipment 113 119 - 232Accruals 534 (141) - 393Provision for other financial assets (469) 469 - -Other 30 (28) 62 64

Net deferred tax asset/(liability) 3,307 (5,503) 62 (2,134)

Recognised deferred tax asset 7,157 (6,530) 62 689Recognised deferred tax liability (3,850) 1,027 - (2,823)

Net deferred tax asset/(liability) 3,307 (5,503) 62 (2,134)

25 Financial Risk Management

The risk management function within the Bank is described in respect of financial risks, operational risksand legal risks. Financial risk comprises market risk (including currency risk, interest rate risk and otherprice risk), credit risk and liquidity risk. The primary objectives of the financial risk management functionare to establish risk limits, and then ensure that exposure to risks stays within these limits.

The risks are managed in an integrated manner and evaluated in terms of the policy of the Bank, which isreviewed and approved by the Management Board on an annual basis. The operational and legal riskmanagement functions are intended to ensure proper functioning of internal policies and procedures, inorder to minimise operational and legal risks.

The risk management functions are divided among the Supervisory Council, the Management Board,Assets and Liabilities Management Committee (ALCO), Credit Committee (for corporate and retailbusiness and interbank operations) and Tariff Committee.

The Supervisory Council has the highest degree of authority with respect to risk management, and isempowered through the charter to approve any transactions on behalf of the Bank, including those whichare outside of the scope of the authority of the Management Board and other governing bodies (ALCO,Tariff and Credit Committees).


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25 Financial Risk Management (Continued)

The Management Board is generally responsible for the activities of the Bank, including those relating torisk management. The Management Board delegates its power with respect to overall asset, liability andrisk management to ALCO, Credit Committee and Tariff Committee.

ALCO coordinates work of all divisions of the Bank with the aim of implementation of the assets andliability management strategies, optimization of asset and liability structure, effective and efficientutilization of the Bank’s credit resources, minimization of risks and achievement of sufficient profitabilitylevel. ALCO manages currency, interest rate, securities portfolio, and loan portfolio and liquidity risks.

The Credit Committees make and approve decisions on credit transactions within their respectiveauthority as well as on other credit-related issues relating to corporate and retail customers and regardingsetting up the limits for parties operating on interbank market (foreign exchange and money market). TheCredit Committees also make decisions on the impairment provision for the financial assets.

In case if the amount of credit application or the total amount of the exposure of the borrower (or thegroup of borrowers), taking into account also the credit related commitments of the Bank in respect of thisborrower (the group of borrowers) and also the transactions on sale/purchase of loan, exceeds the levelof 10% of the Bank’s regulatory capital, the decision regarding the transaction is subject for approval bythe Management Board and the Supervisory Board.

Decisions to issue loans, guarantees or sureties to related parties (other than banks) in the amountexceeding 1 percent of regulatory capital (for individuals) or 3 percent of regulatory capital (for legalentities) are made by the Management Board by 2/3 of votes in secret ballot voting in the absence of theinterested party, with the quorum being at least half of the Management Board members.

Tariff Committee of the Bank acts with the aim to provide additional measures for the risk managementand optimization of the tariff policy regarding the Bank’s products and services, provided to the clients.Tariff Committee, within its area of responsibility, performs monthly analysis of the ratios related toservice costs and competitiveness of the Bank’s tariffs on the market, and also is responsible for theoperating income policies.

Credit risk. The Bank takes on exposure to credit risk, which is the risk that one party to a financialinstrument will cause a financial loss for the other party by failing to discharge an obligation. Exposure tocredit risk arises as a result of the Bank’s lending and other transactions with counterparties giving rise tofinancial assets.

The Bank’s maximum exposure to credit risk is reflected in the carrying amounts of financial assets on thestatement of financial position. For guarantees and commitments to extend credit, the maximum exposureto credit risk is the amount of the commitment. Refer to Note 27.

The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk acceptedin relation to one borrower, or groups of borrowers. Limits on the level of credit risk by product areapproved regularly by the respective committees. Such risks are monitored on a revolving basis and aresubject to an annual, or more frequent, review.

Management monitors concentration of credit risk. For the analysis of concentration of credit risk inrespect of loans and advances to customers refer to Note 10 and Note 9.

The Bank reviews the ageing analysis of outstanding loans and follows up on past due balances.Management, therefore, considers it appropriate to provide ageing and other information about credit riskas disclosed in Notes 9 and 10.

The Bank manages its credit risk by establishing limits in relation to single borrowers and groups ofborrowers, which are recommended by Risk management division and approved by relevant CreditCommittee as a part of the loan portfolio risk management system, and by complying with the exposurelimits set by the NBU.

These ratios are:

- Maximum credit risk exposure per single counterparty (N7) calculated as the ratio of the Bank'stotal exposure to a counterparty or a group of related counterparties plus all financialcommitments issued by the Bank in respect of the counterparty or a group of relatedcounterparties to regulatory capital. The ratio was 23.21% at 31 December 2016 (2015: 24.46%)with the maximum required limit of no more than 25% (2015: 25%).


40


- Large credit risks ratio (N8) calculated as the ratio of total large credit risks in respect ofcounterparties, groups of related counterparties and all related parties of the Bank to regulatorycapital. The ratio was 486.86% at 31 December 2016 (2015: 393.12%) with the maximumrequired limit of no more than 800% (2015: 800%).

- Maximum aggregate credit exposure to related parties (N9) calculated as the ratio of aggregateexposure to related parties of the Bank plus aggregate financial commitments issued by the Bankin respect of its related parties to regulatory capital. The ratio was 1.10% at 31 December 2016with the maximum required limit of no more 25% (2015: 1.41%).

The Bank also mitigates its credit risk by obtaining collateral and using other security arrangements.

Corporate lending

In making its lending decisions, the Bank evaluates potential borrowers on the basis of their financialconditions as reflected in their financial statements, their credit history with the Bank and other financialinstitutions and the amount of risk involved in lending to a particular borrower, using a rating scale. A lackof credit history with the Bank or lack of credit history in general is not an absolute bar to granting a loan,provided the Bank receives sufficient information to assess the borrower’s business and financialcondition. However, when the Bank lends to a borrower with no credit history, it sets conditions such as arequirement to transfer certain part of the customer’s banking operations to the Bank for a certain periodand charging a higher interest rate, or requiring additional collateral or guarantees from such borrower.

In evaluating the risks associated with a particular borrower, the Bank takes into account the borrower’sbusiness and factors such as the quality of its management, its main business activities, its geographiclocation, suppliers, customers, other indebtedness, financial stability, turnover, likely return on the loan,the liquidity of the proposed collateral and whether it is sufficient in view of the credit risk.

Retail lending

Retail loans are subject to a standardised approval procedure.

The approval is primarily based on financial condition and solvency of the borrower. The timing andfrequency of assessment of the financial position of the borrower depends on the servicing of the debtand term of the loan, however, it should be made not less than once a year.

The determination of the financial condition of the borrower includes general data, financial indicators andpurpose of the loan. Loans are subject to maximum limits depending on the applicant’s income, stabilityof future earnings, liquidity and quality of collateral. The Credit Committee reviews a credit application andmakes the relevant decision as to whether to grant the loan.

The Bank continuously monitors the performance of individual credit exposures and regularly reassessesthe creditworthiness of its customers. The review is based on an analysis of overdue payments and otherinformation obtained by the Bank. In light of this information the borrower’s credit rating may be revised.

The basic means of problem loan recovery include foreclosure of the pledged property and recovery offunds from the debtor or guarantor.

Residual credit risk

Residual credit risk arises when the Bank fails to realise the value of a credit risk mitigation tools such asguarantees or collateral. This could result for example from an ineffective legal document resulting indelayed or no payment when an asset defaults. Agreements on products that are collateralised withassets contain a clause prescribing rights for the Bank to further charge the residual amount to theborrower.

Credit risk for off-balance sheet financial instruments

Credit risk for off-balance sheet financial instruments is defined as the possibility of sustaining a loss as aresult of another party to a financial instrument failing to perform in accordance with the terms of thecontract. The Bank uses the same credit policies in assuming conditional obligations as it does for on-balance sheet financial instruments, through established credit approvals, risk control limits andmonitoring procedures.


41


Market risk. The Bank takes on exposure to market risks. Market risks arise from open positions in(a) currency, (b) interest rates and (c) equity products, all of which are exposed to general and specificmarket movements. Management sets limits on the value of risk that may be accepted, which ismonitored on a daily basis. However, the use of this approach does not prevent losses outside of theselimits in the event of more significant market movements. Overall authority for market risk is vested withALCO.

Currency risk. In respect of currency risk, management sets limits on the level of exposure by currencyand in total for both overnight and intra-day positions, which are monitored daily. Management monitorsthe Bank’s currency positions in accordance with the regulations of the NBU and internally developedmethodology.

The table below summarises the Bank’s exposure to foreign currency exchange rate risk at the end of thereporting period:

At 31 December 2016

In thousands of hryvniasMonetary financial

assetsMonetary financial

liabilities Net position

Ukrainian hryvnias 4,023,824 3,522,857 500,967US Dollars 3,158,120 3,192,318 (34,198)Euros 469,249 476,125 (6,876)Other 15,455 12,902 2,553

Total 7,666,648 7,204,202 462,446

The table below summarises the Bank’s exposure to foreign currency exchange rate risk at the end of theprevious reporting period:

At 31 December 2015

In thousands ofhryvnias

Monetary financialassets

Monetary financialliabilities Net position

Ukrainian hryvnias 2,902,955 2,510,225 392,730US Dollars 3,110,879 3,138,996 (28,117)Euros 457,589 473,919 (16,330)Other 8,765 6,008 2,757

Total 6,480,188 6,129,148 351,040

The above analysis includes only monetary assets and liabilities. Investments in equities and non-monetary assets are not considered to give rise to any material currency risk.

Currency risk concentrations on credit related commitments as at 31 December 2016 are analysed asfollows:

In thousands of hryvnias UAH USD EUR Other Total

At 31 December 2016:Commitments to extend credit 25,745 - - - 25,745Guarantees and avals issued 332,846 145,865 29,331 - 508,042

Currency risk concentrations on credit related commitments as at 31 December 2015 are analysed asfollows:

In thousands of hryvnias UAH USD EUR Other Total

At 31 December 2015:Commitments to extend credit 19,817 - - - 19,817Guarantees and avals issued 151,770 27,431 100,840 - 280,041


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The following table presents sensitivities of profit or loss and equity to reasonably possible changes inexchange rates applied at the end of the reporting period relative to the functional currency of the Bank,with all other variables held constant:

At 31 December 2016 At 31 December 2015

In thousands of hryvniasImpact on profitor loss after tax Impact on equity

Impact on profitor loss after tax

Impact onequity

US Dollar strengthening by 10%(2015: strengthening by 20%) (3,420) (3,420) (5,623) (5,623)

US Dollar weakening by 5% (2015:weakening by 10%) 1,710 1,710 2,812 2,812

Euro strengthening by 10% (2015:strengthening by 20%) (688) (688) (3,266) (3,266)

Euro weakening by 5% (2015:weakening by 10%) 344 344 1,633 1,633

Other strengthening by 10% (2015:strengthening by 20%) 255 255 551 551

Other weakening by 5% (2015:weakening by 10%) (128) (128) (276) (276)

A negative amount in the table reflects a potential net reduction in the statement of profit or loss and othercomprehensive income or changes in equity, while a positive amount reflects a net potential increase.

The sensitivity was calculated only for monetary balances denominated in currencies other than thefunctional currency of the Bank.

The above effect of changes in currency rates on the net profit and equity relates to revaluation of opencurrency position only and does not take into account the potential decrease in credit quality of assets asa result of devaluation of Ukrainian hryvnia.

Interest rate risk. The Bank takes on exposure to the effects of fluctuations in the prevailing levels ofmarket interest rates on its financial position and cash flows. Interest margins may increase as a result ofsuch changes, but may reduce or create losses in the event that unexpected movements arise.Management monitors on a daily basis and sets limits on the level of mismatch of interest rate repricingthat may be undertaken. In practice, management resets interest rates on both assets and liabilitiesbased on current market conditions and mutual agreement, which is documented in an addendum to theoriginal agreement, which sets forth the new interest rate.

The ALCO and Credit Committees are responsible for interest rate risk management, including minimumcredit and maximum borrowing rates in respect of products, customer groups and counterparties. TheCredit Committees are responsible for ensuring compliance with guidelines set by ALCO. At the sametime the corporate and retail business divisions recommend altering certain interest rates to ALCOsubject to changes in market conditions or for internal reasons. Interest rate risk management isconducted using the “GAP” analysis method, whereby the difference or gap between rate sensitive assetsand rate sensitive liabilities is determined and analysed.


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The table below summarises the Bank’s exposure to interest rate risks. The table presents theaggregated amounts of the Bank’s financial assets and liabilities at carrying amounts, categorised by theearlier of contractual interest repricing or maturity dates:


Demandand less

than1 month

From 1 to3 months

From 3 to12 months

More than1 year

Non-monetary Total

31 December 2016

Total financial assets 3,846,379 1,035,285 2,329,777 455,207 - 7,666,648Total financial liabilities 4,450,669 613,119 1,362,218 778,196 - 7,204,202

Net interest sensitivitygap at 31 December 2016 (406,290) 422,166 967,559 (322,989) - 462,446

31 December 2015Total financial assets 3,635,522 373,176 1,959,147 512,343 44,566 6,524,754Total financial liabilities 4,154,493 488,634 1,265,767 220,254 - 6,129,148

Net interest sensitivitygap at 31 December 2015 (518,971) (115,458) 693,380 292,089 44,566 395,606

The Bank's floating rate liabilities as at the end of 2016 are represented by other borrowed funds. Refer toNote 16.

At 31 December 2016, if interest rates at that date had been 100 basis points lower (2015: [100] basispoints lower) with all other variables held constant, profit for the year would have been UAH 480 thousand(2015: UAH 1,562 thousand) higher, mainly as a result of lower interest expense on variable interestliabilities. If interest rates had been 100 basis points higher (2015: [100] basis points higher), with all othervariables held constant, profit would have been UAH 480 thousand (2015: UAH 1,562 thousand) lower,mainly as a result of higher interest expense on variable interest liabilities.

The Bank monitors interest rates for its financial instruments. The table below summarises interest ratesbased on reports reviewed by key management personnel. The sign “-“ in the table below means that theBank does not have the respective assets or liabilities in the corresponding currency as at the reportingdate:


44


In % p.a.

2016 2015

UAH USD EUR Other UAH USD EUR Other

AssetsDue from other banks:

Correspondent accounts withother banks 0% 0% 0% 0% 1% 0% 0% 0%

Term placements with otherbanks - - - - - - - -

Loans and advances to customers:Corporate loans 20% 10% 7% - 21% 11% 8% -

Investment securities available forsale 14% - - - 21% - - -

LiabilitiesDue to other banks:

Correspondent accounts andovernight placements of otherbanks - 2% 4% 2% - 4% 4% -

Term loans received - 9% 8% - - 8% 8% -Current accounts 6% 4% 1% - 7% 5% 4% -Deposits 16% 7% 4% - 14% 8% 4% -Other borrowed funds - 7% - - - 10% - -Subordinated debt 16.5% 8% - - 16.5% 8% - -

Other price risk. The Bank has no exposure to equity price risk (2015: no exposure to equity price risk).


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Geographical risk concentrations. The geographical concentration of the Bank’s financial assets andliabilities at 31 December 2016 is set out below:

In thousands of hryvnias Ukraine OECD Non-OECD Total

Financial assetsCash 662,450 - - 662,450Balances with the National Bank of Ukraine 291,375 - - 291,375Due from other banks 68,568 1,050,128 2,213 1,120,909Loans and advances to customers 4,835,716 - - 4,835,716Investment securities available for sale 632,403 - - 632,403Other financial assets 123,795 - - 123,795

Total financial assets 6,614,307 1,050,128 2,213 7,666,648

Financial liabilitiesDue to other banks 2,489 5,896 844,187 852,572Current accounts 3,977,836 208,322 2,187 4,188,345Deposits 2,024,925 2,783 1,196 2,028,904Other borrowed funds - 41,367 - 41,367Other financial liabilities 7,120 - - 7,120Subordinated debt 85,894 - - 85,894

Total financial liabilities 6,098,264 258,368 847,570 7,204,202

Net position in financial instruments 516,043 791,760 (845,357) 462,446

Credit related commitments 533,737 50 - 533,787

Assets, liabilities and credit related commitments have been allocated based on the country in which thecounterparty is located. Cash on hand has been allocated based on the country in which it is physicallyheld.

OECD assets and liabilities mainly include balances with counterparties in USA, Germany, UK, andAustria. Non-OECD concentrations mainly represent balances with counterparties in the RussianFederation and Cyprus.

The geographical concentration of the Bank’s financial assets and liabilities at 31 December 2015 is setout below:

In thousands of hryvnias Ukraine OECD Non-OECD Total

Financial assetsCash 396,221 - - 396,221Balances with the National Bank of Ukraine 270,256 - - 270,256Due from other banks 20,858 1,498,482 6,857 1,526,197Loans and advances to customers 3,713,809 - - 3,713,809Investment securities available for sale 606,059 - - 606,059Other financial assets 12,212 - - 12,212

Total financial assets 5,019,415 1,498,482 6,857 6,524,754

Financial liabilitiesDue to other banks - 357,021 1,134,706 1,491,727Current accounts 2,634,726 180,370 519 2,815,615Deposits 1,643,091 2,349 28,895 1,674,335Other borrowed funds - 60,480 - 60,480Other financial liabilities 6,361 - - 6,361Subordinated debt 80,629 - - 80,629

Total financial liabilities 4,364,807 600,220 1,164,120 6,129,147

Net position in financial instruments 654,608 898,262 (1,157,263) 395,607

Credit related commitments 299,858 - - 299,858


46


Liquidity risk. Liquidity risk is the risk that an entity will encounter difficulty in meeting obligationsassociated with financial liabilities. The Bank is exposed to daily calls on its available cash resources fromovernight deposits, current accounts, maturing deposits, loan draw-downs and guarantees. The Bankdoes not maintain cash resources to meet all of these needs as experience shows that a minimum levelof reinvestment of maturing funds can be predicted with a high level of certainty. Liquidity risk is managedby the Asset/Liability Committee of the Bank.

The Bank seeks to maintain a stable funding base primarily consisting of corporate and retail customerdeposits. The Bank invests the funds in diversified portfolios of liquid assets, in order to be able torespond quickly and smoothly to unforeseen liquidity requirements, under both normal and stressedconditions, without incurring unacceptable losses or risking damage to the Bank’s reputation.

The Treasury Department receives information from other business units regarding the liquidity profile oftheir financial assets and liabilities and details of other projected cash flows. The Treasury Departmentthen maintains a portfolio of short-term liquid assets, to ensure that sufficient liquidity is maintained withinthe Bank as a whole.

The Bank has access to a diverse funding base. Funds are raised using a broad range of instrumentsincluding deposits and contributions by shareholders. This enhances funding flexibility, limits dependenceon any one source of funds and generally lowers the cost of funds. Management strives to maintain abalance between continuity of funding and flexibility through use of liabilities with a range of maturities.Deposits from customers and banks generally have short maturity and a large portion of them isrepayable on demand. The short-term nature of these deposits increases the Bank’s liquidity risk, and theBank actively manages the risk through competitive pricing and constant monitoring of market trends.

The liquidity management of the Bank requires consideration of the level of liquid assets necessary tosettle obligations as they fall due; maintaining access to a range of funding sources; maintaining fundingcontingency plans; and monitoring liquidity ratios against regulatory requirements. The Bank calculatesliquidity ratios on a daily basis in accordance with the requirement of the National Bank of Ukraine. Theseratios are:

- Instant liquidity ratio (N4), which is calculated as the ratio of highly-liquid assets to liabilitiespayable on demand. The ratio was 80.33% at 31 December 2016 (2015: 107.72%) with theminimum required limit of not less than 20% (2015: 20%);

- Current liquidity ratio (N5), which is calculated as the ratio of liquid assets to liabilities maturingwithin 31 calendar days. The ratio was 63.91% at 31 December 2016 (2015: 70.04%) with theminimum required limit of not less than 40% (2015: 40%);

- Long-term liquidity ratio (N6), which is calculated as the ratio of liquid assets to liabilities withoriginal maturity of up to one year. The ratio was 100.53% at 31 December 2016 (2015: 95.19%)with the minimum required limit of not less than 60% (2015: 60%).

The daily liquidity position is monitored and regular liquidity stress testing, under a variety of scenarioscovering both normal and more severe market conditions, is performed by the Treasury Department.

The table below shows liabilities at 31 December 2016 by their remaining contractual maturity. Theamounts disclosed in the maturity table are the contractual undiscounted cash flows, including gross loancommitments and financial guarantees. Such undiscounted cash flows differ from the amount included inthe statement of financial position because the amount in the statement of financial position is based ondiscounted cash flows. When the amount payable is not fixed, the amount disclosed is determined byreference to the conditions existing at the end of the reporting period. Foreign currency payments aretranslated using the spot exchange rate at the end of the reporting period.


47


The maturity analysis of financial liabilities at 31 December 2016 and 2015 based on undiscounted cashflows for financial liabilities is as follows:


Demandand less

than1 month

From 1 to3 months

From 3 to12 months

More than12 months Total

31 December 2016

Due to other banks 657,087 54,981 22,671 128,584 863,323Current accounts 4,188,345 - - - 4,188,345Deposits 453,499 464,323 1,006,022 218,413 2,142,257Other borrowed funds 41,367 - - - 41,367Other financial liabilities 7,120 - - - 7,120Subordinated debt 1,630 1,688 7,594 117,168 128,080Commitments to extend credits 917 2,129 22,699 - 25,745Financial guarantees 29,395 210,421 176,129 726 416,671Avals issued - - 89,712 - 89,712Letter of credit issued 1,658 - - - 1,658

Total potential future payments forfinancial obligations as at 31 December2016

5,381,018 733,542 1,324,827 464,891 7,904,278

31 December 2015

Due to other banks 1,250,533 90,165 163,754 - 1,504,452Current accounts 2,815,615 - - - 2,815,615Deposits 623,128 235,453 778,182 111,361 1,748,124Other borrowed funds 60,480 - - - 60,480Other financial liabilities 4,492 700 720 450 6,362Subordinated debt 1,548 1,603 7,211 107,285 117,647Commitments to extend credits 19,817 - - - 19,817Financial guarantees 222,912 - - - 222,912Avals issued 57,129 - - - 57,129

Total potential future payments forfinancial obligations as at 31 December2015 5,055,654 327,921 949,867 219,096 6,552,538

Liquidity requirements to support calls under guarantees are considerably less than the amount of thecommitment disclosed in the above maturity analysis, because the Bank does not generally expect thethird party to draw funds under the agreement.

Current accounts and due to banks are due on demand and have been reflected as such in theseschedules. However, management estimates that demand on a majority of the accounts will occur atsignificantly later date.

Deposits are classified in the above analysis based on contractual maturities. According to the UkrainianCivil Code amendments adopted during 2015, individuals have a right to withdraw their term depositsprior to maturity only in cases where it is stipulated in the contract of bank term deposit.


48


The Bank does not use the above maturity analysis based on undiscounted contractual maturities ofliabilities to manage liquidity. Instead, the Bank monitors expected maturities, which may be summarisedas follows at 31 December 2016:


Demand andless than1 month

From 1 to3 months

From 3 to12 months

More than 12months

Total

AssetsCash 662,450 - - - 662,450Balances with the National Bank ofUkraine 291,375 - - - 291,375

Due from other banks 1,120,909 - - - 1,120,909Loans and advances to customers 1,137,248 1,035,285 2,329,777 333,406 4,835,716Investment securities available forsale 632,403 - - - 632,403

Other financial assets 1,994 - - 121,801 123,795

Total financial assets

LiabilitiesDue to other banks 654,896 53,460 16,315 127,901 852,572Current accounts 3,346,797 78,842 378,309 384,397 4,188,345Deposits 441,070 439,450 967,594 180,790 2,028,904Other borrowed funds - 14,724 13,324 13,319 41,367Other financial liabilities 7,120 - - - 7,120Subordinated debt 786 - - 85,108 85,894

Total financial liabilities 4,450,669 586,476 1,375,542 791,515 7,204,202

Liquidity gap arising from financialinstruments

(604,290) 448,809 954,235 (336,308) 462,446

Cumulative liquidity gap as at31 December 2016

(604,290) (155,481) 798,754 462,446

The Bank has a liquidity gap of assets and liabilities on demand and up to 3 months. This liquidity gaparises from the fact that an important source of funding for the Bank as of 31 December 2016 werecustomer accounts and interbank deposits on demand. Management believes that in spite of a substantialportion of customer accounts being on demand, diversification of these deposits by number and type ofdepositors, and the past experience of the Bank would indicate that these customer accounts provide along-term and stable source of funding for the Bank. As such in the table above on demand customeraccounts were classified based on expected maturities although according to contract terms customermay claim for funds at any moment.

As disclosed in Note 27, as at 31 December 2016 the Bank did not comply with some covenants relatingto its borrowed funds in the amount of UAH 41,367 thousand, which may result in the creditor's call onearly repayment. This balance was presented within "Demand and less than 1 month" in the maturityanalysis of financial liabilities based on undiscounted cash flows as at 31 December 2016 above(31 December 2015: presented within "Demand and less than 1 month"). In the analysis by expectedmaturity this balance was classified between appropriate categories based on initial contractual maturitiesas the Bank does not expect that the creditor will demand early repayment.


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The expected liquidity position of the Bank at 31 December 2015 is set out below.


Demandand less

than1 month

From 1 to3 months

From 3 to12 months

More than12 months

Total

AssetsCash 396,221 - - - 396,221Balances with the National Bank of Ukraine 270,256 - - - 270,256Due from other banks 1,526,197 - - - 1,526,197Loans and advances to customers 881,355 373,176 1,946,935 512,343 3,713,809Investment securities available for sale 561,493 - - 44,566 606,059Other financial assets - - 12,212 - 12,212

Total financial assets 3,635,522 373,176 1,959,147 556,909 6,524,754

LiabilitiesDue to other banks 1,245,606 88,144 157,977 - 1,491,727Current accounts 2,121,903 105,481 363,387 224,844 2,815,615Deposits 88,227 385,733 1,094,620 105,755 1,674,335Other borrowed funds - 14,057 12,000 34,423 60,480Other financial liabilities 4,298 700 1,170 193 6,361Subordinated debt 747 - - 79,882 80,629

Total financial liabilities 3,460,781 594,115 1,629,154 445,097 6,129,147

Liquidity gap arising from financialinstruments 174,741 (220,939) 329,993 111,812 395,607

Cumulative liquidity gap as at31 December 2015 174,741 (46,198) 283,795 395,607 -

The matching and/or controlled mismatching of the maturities and interest rates of assets and liabilities isfundamental to the management of the Bank. It is unusual for banks ever to be completely matched sincebusiness transacted is often of an uncertain term and of different types. An unmatched position potentiallyenhances profitability, but can also increase the risk of losses. The maturities of assets and liabilities andthe ability to replace, at an acceptable cost, interest-bearing liabilities as they mature, are importantfactors in assessing the liquidity of the Bank and its exposure to changes in interest and exchange rates.


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26 Management of Capital

The Bank’s objectives when managing capital are (i) to comply with the capital requirements set by theNational Bank of Ukraine and (ii) to safeguard the Bank’s ability to continue as a going concern. The Bankconsiders total capital under management to be equity as shown in the statement of financial position.The amount of capital that the Bank managed as of 31 December 2016 was UAH 523,021 thousand(2015: UAH 426,001 thousand). Compliance with capital adequacy ratios set by the National Bank ofUkraine is monitored monthly, with reports outlining their calculation reviewed and signed by the Bank’sChairman and Chief Accountant. Other objectives of capital management are evaluated annually.

The Bank’s policy is to maintain a strong capital base so as to maintain creditor and market confidenceand to sustain future development of the business.

During 2016, the National Bank of Ukraine (the "NBU" or "Regulator") conducted the diagnostic study andstress-testing of the Bank under the NBU Regulation 59 dated 4 February 2016 On Diagnostic Study ofBanks (the "Regulation"). As a result, in December 2016, the Bank submitted to the NBU the action planto increase capitalisation (improve capital adequacy) for the period from 18 October 2016 to 1 January2019. The action plan was approved by the regulator on 21 March 2017; according to the capitalisationplan, the Bank is required to increase its regulatory capital by UAH 252,117 thousand. The action planalso contains the list of actions for UAH 160,801 thousand, completed by the Bank at the date ofsubmission of the action plan for approval to the NBU. The remaining amount is expected to be coveredby additional capital injection, attraction of new subordinated debt and reduction of uncovered credit risk.

Under the current capital requirements set by the National Bank of Ukraine, banks have to maintain aratio of regulatory capital to risk weighted assets (“statutory capital ratio”) above a prescribed minimumlevel. As at 31 December 2016, the minimum level required by the NBU was 10% (31 December 2015:10%). Regulatory capital is based on the Bank’s daily reports prepared under regulatory requirementsbefore period-end adjustments and comprises:


Primary capital 299,467 308,641Additional capital 267,844 195,447

Total regulatory capital 567,311 504,088

Capital adequacy ratio 12.14% 13.54%

In addition, in 2016, the NBU introduced the new Regulation 351 “On determination of the value of creditrisk on banking operations” (the “Regulation 351”), effective from 3 January 2017. New regulationamends the method of calculation of credit risk for the purposes of determination of capital adequacyratio. The Bank does not expect the new regulation to have significant impact on its regulatory capital.

27 Contingencies and Commitments

Legal proceedings. From time to time and in the normal course of business, claims against the Bankmay be received. On the basis of its own estimates and internal professional advice, management is ofthe opinion that no material losses will be incurred in respect of claims, and accordingly no provision hasbeen made in these financial statements.

Tax contingencies. Ukrainian tax legislation which was enacted or substantively enacted at the end ofthe reporting period is subject to varying interpretations when being applied to the transactions andactivities of the Bank. Consequently, tax positions taken by management and the formal documentationsupporting the tax positions may be successfully challenged by relevant authorities. Ukrainian taxadministration is gradually strengthening, including the fact that there is a higher risk of review of taxtransactions without a clear business purpose or with tax incompliant counterparties.

The Ukrainian tax authorities may be taking a more assertive and sophisticated approach in theirinterpretation of the legislation and tax examinations. Combined with a possible increase in tax collectionefforts to respond to budget pressures, the above may lead to an increase in the level and frequency ofscrutiny by the tax authorities. In particular, it is possible that transactions and activities that have notbeen challenged in the past may be challenged. As a result, significant additional taxes, penalties andinterest may be assessed.


51

27 Contingencies and Commitments (Continued)

Fiscal periods remain open to review by the authorities in respect of taxes for three calendar yearspreceding the year of review. Under certain circumstances reviews may cover longer periods.

Ukrainian tax legislation does not provide definitive guidance in certain areas. From time to time, the Bankadopts interpretations of such uncertain areas that reduce the overall tax rate of the Bank. As notedabove, such tax positions may come under heightened scrutiny. The impact of any challenge by the taxauthorities cannot be reliably estimated; however, it may be significant to the financial position and/or theoverall operations of the Bank.

In December 2016, Ukrainian Parliament passed the Law of Ukraine On Amendments to the Tax Code ofUkraine in Order to Improve Investment Climate in Ukraine No 1797-VIII dated 21 December 2016 andthe law of Ukraine On Changes to the Tax Code of Ukraine and Some Other Legislative Acts onMaintaining a Balance of Budget Revenues in 2017 No 1791-VIII dated 20 December 2016 that amendeffective Tax Code.

The amended Tax Code resolves some of the inconsistencies relating to creation and utilisation of assetimpairment provisions by banks, in particular, from 1 January 2017:

- provisioning criterion by the level of credit risk no longer applies;

- the 25% cap on the level of provision deductible for tax purposes is extended for the period from1 January 2016 to 1 January 2018;

- an outstanding financial loan is classified as bad debt and may be written off against the provisionif overdue 360 calendar days or more (except loans to related parties and current or formeremployees of the creditor).

Management is in the process of assessing the impact of these changes on the Bank's operations and taxreporting.

Capital expenditure commitments. At 31 December 2016, the Bank had contractual capital expenditurecommitments in respect of premises and equipment totalling UAH 1,133 thousand (2015: nil).

The Bank has allocated resources required to meet such commitments. The Bank believes that future netincome and funding will be sufficient to cover these and any similar commitments.

Operating lease commitments. Where the Bank is the lessee, the future minimum lease paymentsunder non-cancellable operating leases are as follows:


201631 December

2015

Not later than 1 year 12,951 20,205Later than 1 year and not later than 5 years 7 21,112

Total operating lease commitments 12,958 41,317

Credit related commitments. The primary purpose of these instruments is to ensure that funds areavailable to a customer as required.

Outstanding credit related commitments are as follows:

In thousands of hryvnias 31 December2016

31 December2015

Guarantees issued 416,672 222,912Avals 89,712 57,129Irrevocable commitments to extend credit 25,745 19,817Letters of Credit 1,658 -

Less: Cash covered credit related commitments (12,255) (43,029)

Total credit related commitments 521,532 256,829


52

27 Contingencies and Commitments (Continued)

Bank had outstanding irrevocable commitments to extend credit in respect of overdrafts on card accountsof individuals. All other commitments to extend credit are revocable. With respect to credit risk oncommitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the totalunused commitments, if the unused amounts were to be drawn down. However, the likely amount of lossis less than the total unused commitments since most commitments to extend credit are contingent uponcustomers maintaining specific credit standards.

Guarantees, which represent irrevocable assurances that the Bank will make payments in the event thata customer cannot meet its obligations to third parties, carry the same credit risk as loans. The totaloutstanding contractual amount of undrawn guarantees does not necessarily represent future cashrequirements, as these financial instruments may expire or terminate without being funded.

Assets pledged and restricted. The Bank had assets pledged as collateral or otherwise restricted withthe following carrying value:

2016 2015

In thousands of hryvnias Assetpledged

Assetpledged

Guarantee deposits for guarantees issued and settlements with international payment cards 114,802 221,503Guarantee cover within payment systems Visa and Master Card 121,801 -

Total 236,603 221,503

In addition, as described in Note 8, as at 31 December 2016 mandatory reserves balances in the amountof UAH 127,860 thousand (2015: UAH 119,666 thousand) represent mandatory reserve deposits whichare not available to finance the Bank’s day-to-day operations.

Compliance with covenants. The Bank is subject to certain covenants primarily relating to its otherborrowed funds. Non-compliance with such covenants may result in negative consequences for the Bankincluding early demand of funds by the creditors at their discretion. In particular, the Bank is required tomaintain a certain capital adequacy ratio, a certain liquidity ratio, predetermined maximum exposure to asingle party to equity ratio, predetermined level of aggregate exposure to related parties to equity, acertain ratio of aggregate large exposures to equity, a certain operating expense ratio, requirements tonet foreign currency position, a certain open credit exposure ratio, a predetermined net liquidity gap, aswell as to comply with the NBU ratios.

As at 31 December 2016, the Bank was not in compliance with certain covenants in respect of otherborrowed funds (being capital adequacy ratio, maximum exposure to any single party, aggregate largeexposures to equity ratio, open credit exposure to Tier 1 capital ratio and negative liquidity gap) andnotified the creditor accordingly. This may result in the creditor's call on early repayment on these otherborrowed funds (Note 16). As at the date of release of these financial statements, the creditor's finaldecision regarding early repayment of borrowings is pending. Refer to Note 25 for the disclosure of theborrowings as “on demand” in the liquidity analysis.


53

28 Fair Value of Financial Instruments

Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) level one aremeasurements at quoted prices (unadjusted) in active markets for identical assets or liabilities, (ii) leveltwo 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 threemeasurements are valuations not based on observable market data (that is, unobservable inputs).

Management applies judgement in categorising financial instruments using the fair value hierarchy. If afair value measurement uses observable inputs that require significant adjustment, that measurement is aLevel 3 measurement. The significance of a valuation input is assessed against the fair valuemeasurement in its entirety.

(a) Recurring fair value measurements

Recurring fair value measurements are those that the accounting standards require or permit in thestatement of financial position at the end of each reporting period. The level in the fair value hierarchy intowhich the recurring fair value measurements are categorised are as follows:

31 December 2016 31 December 2015In thousands of hryvnias Level 1 Level 2 Total Level 1 Level 2 Total

FINANCIAL ASSETS AT FAIR VALUEInvestment securities available for sale- Ukrainian government bonds 272 - 272 340 - 340- Deposit certificates issued by the NBU - 632,131 632,131 - 561,153 561,153

TOTAL FINANCIAL ASSETS RECURRINGFAIR VALUE MEASUREMENTS 272 632,131 632,403 340 561,153 561,493

The description of valuation method and description of inputs used in the fair value measurement for level2 measurements at 31 December 2016:

In thousands of hryvniasFair value Valuation method Inputs used

FINANCIAL ASSETS AT FAIR VALUEInvestment securities available for sale

Deposit certificates issued by the NBU 632,131 Discounted Cash FlowsMarket Prices and %

Rates

TOTAL FINANCIAL ASSETSRECURRING FAIR VALUEMEASUREMENTS 632,131

The description of valuation method and description of inputs used in the fair value measurement for level2 measurements at 31 December 2015:

In thousands of hryvniasFair value Valuation method Inputs used

FINANCIAL ASSETS AT FAIR VALUEInvestment securities available for sale

Deposit certificates issued by the NBU 561,153 Discounted Cash FlowsMarket Prices and %

Rates

TOTAL FINANCIAL ASSETSRECURRING FAIR VALUEMEASUREMENTS 561,153

There were no changes in valuation method for level 2 recurring fair value measurements during theyears ended 31 December 2016 and 2015.


54

28 Fair Value of Financial Instruments (Continued)

(b) Non-recurring fair value measurements

The Bank has no respective balances as at 31 December 2016.

(c) Assets and liabilities not measured at fair value but for which fair value is disclosed

Fair values analysed by level in the fair value hierarchy and carrying value of assets not measured at fairvalue are as follows:

31 December 2016 31 December 2015In thousands of

hryvnias Level 1 Level 2 Level 3Carrying

value Level 1 Level 2 Level 3Carrying

value

FINANCIAL ASSETSCash and cashequivalents

Cash 662,450 - - 662,450 396,221 - - 396,221Balances with theNational Bank of Ukraine - 291,375 - 291,375 - 270,256 - 270,256

Due from other banksCorrespondent accountswith other banks - 1,111,607 - 1,111,607 - 1,390,364 - 1,390,364

Term placements withother banks - 9,364 - 9,364 - 135,895 - 135,895

Loans and advances tocustomers

Corporate loans - - 4,811,961 4,811,961 - - 3,694,704 3,694,704Retail loans:- consumer loans - - 8,966 8,966 - - 6,869 6,869- card loans - - 11,526 11,526 - - 9,556 9,556- mortgage loans - - 1,984 1,984 - - 1,911 1,911- auto loans - - 1,279 1,279 - - 769 769

Investment securitiesavailable for sale - - - - - - 44,566 44,566

Other financial assets - - 123,795 123,795 - - 12,212 12,212

TOTAL 662,450 1,412,346 4,959,511 7,034,307 396,221 1,796,515 3,770,587 5,963,323


55

28 Fair Value of Financial Instruments (Continued)

Fair values analysed by level in the fair value hierarchy and carrying value of liabilities not measured atfair value are as follows:

2016 2015In thousands of

hryvniasLevel 1 Level 2 Level 3 Carrying

valueLevel 1 Level 2 Level 3 Carrying

value

FINANCIAL LIABILITIESDue to other banksCorrespondent accountsand overnightplacements of otherbanks - 236,735 - 236,735 - 309,205 - 309,205

Short-term loans received - 487,913 - 487,913 - 1,064,438 - 1,064,438Long-term depositsreceived - 127,924 - 127,924 - 118,084 118,084

Current accounts anddeposits

Current accounts- current accounts oflegal entities - 2,915,762 - 2,915,762 - 1,720,104 - 1,720,104

- current accounts ofindividuals - 1,272,583 - 1,272,583 - 1,095,511 - 1,095,511

Deposits- deposits of legalentities - 680,653 84,303 762,109 - 702,617 69,848 781,039

- deposits of individuals - 274,099 1,011,141 1,266,795 - 47,745 843,368 893,296

Other borrowed funds- Loan from BSTDB - 41,367 - 41,367 - 60,480 - 60,480

Other financial liabilitiesOther financial liabilities

- - 7,120 7,120 - 6,361 - 6,361

Subordinated debtSubordinated debt - - 90,969 85,894 - - 82,974 80,629

TOTAL - 6,037,036 1,193,533 7,204,202 - 5,124,545 996,190 6,129,147

The fair values in level 2 and level 3 of fair value hierarchy were estimated using the discounted cashflows valuation method. The fair value of floating rate instruments that are not quoted in an active marketwas estimated to be equal to their carrying amount. The fair value of unquoted fixed interest rateinstruments was estimated based on estimated future cash flows expected to be received discounted atcurrent interest rates for new instruments with similar credit risk and remaining maturity.

For assets, the Bank used assumptions about the interest rates at which the counterparty could currentlyobtain new borrowing from an unrelated lender. Liabilities were discounted at the Bank’s own respectiverate. Liabilities due on demand were discounted from the first date that the amount could be required tobe paid by the Bank.


56

29 Presentation of Financial Instruments by Measurement Category

For the purposes of measurement, IAS 39, Financial Instruments: Recognition and Measurement,classifies financial assets into the following categories: (a) loans and receivables; (b) available-for-salefinancial assets; (c) financial assets held to maturity and (d) financial assets at fair value through profit orloss (“FVTPL”). Financial assets at fair value through profit or loss have two sub-categories: (i) assetsdesignated as such upon initial recognition, and (ii) those classified as held for trading. In addition,finance lease receivables form a separate category.

As at 31 December 2016 and 31 December 2015, all of the Bank’s financial assets were classified asloans and receivables, except for investment securities available for sale.

As of 31 December 2016 and 31 December 2015, all of the Bank’s financial liabilities were carried atamortised cost.

30 Related Party Transactions

The Bank grants loans and advances, attracts deposits and performs other transactions with relatedparties in the ordinary course of business. Parties are generally considered to be related if the parties areunder common control, or one party has the ability to control the other party or can exercise significantinfluence over the other party in making financial or operational decisions. In considering each possiblerelated party relationship, attention is directed to the substance of the relationship, not merely the legalform. Terms of transactions with related parties are established at the time of the transaction. Relatedparties comprise entities under control of significant shareholders, members of the Supervisory Board,Management Board and their immediate family members.


57

30 Related Party Transactions (Continued)

At 31 December 2016, the outstanding balances with related parties were as follows:


Significantshareholders

and theirclose family

members

Entitiesunder

control ofsignificant

shareholders

Keymanagement

personnel andtheir close

familymembers

Other relatedparties -

individuals

Loans and advances to customersGross amount of loans and advances to

rate: 14%-24%) - 2,515 515Provision for asset transactions - 1 1

Due to other banks

(contractual interest rate: 1.5%-5%) - 64,010 - -

(contractual interest rate: 5%) - 5,341 - -

(contractual interest rate: 0%) - 23 - -

(contractual interest rate: 0%) - 59 - -Overnight loans received in USD

(contractual interest rate: 2%) - 155,005 -Overnight loans received in GBP

(contractual interest rate: 2%) - 6,632 -Short-term loans received in USD

(contractual interest rate: 5.5%-9.7%) - 331,506 - -Short-term loans received in EUR

(contractual interest rate: 6.7%-9.7%) - 153,687 -Long-term deposits received in EUR

(contractual interest rate: 6.4%) - 127,924 -Customer accounts

Current accounts in UAH(contractual interest rate: 0%-19%) 2,572 155,796 2,560 598

(contractual interest rate: 0%-9%) 63,582 136 4,214 14,160

(contractual interest rate: 0%-7%) 23,783 1,897 599 1,204

(contractual interest rate: 0%) - - -

(contractual interest rate: 16.5%-18%) - - 1,073

(contractual interest rate: 3.5%-8.5%) 275 - 2,250

(contractual interest rate: 6.5%) - - 144

(contractual interest rate: 8%) 50,387 - -

(contractual interest rate: 16.5%) - 35,506 -Provision for vacations 1,911 - 588

Other financial and non-financial liabilities 162 3,319 17Commitments to extend credit 50 14,276 479Guarantees issued - 2,175 -Receivables on transactions in foreign

currencies - 375,794 -Payables on transactions in foreign

currencies - 376,154 -


58


Other related parties - individuals are represented by the shareholders of the entities under commoncontrol, who may have an influence on business decisions of the Bank’s shareholders.

As at 31 December 2016, subordinated debt denominated in USD with the carrying value of UAH 50,387thousand (31 December 2015: UAH 45,131 thousand) was received in October 2012. As at 31 December2016, subordinated debt denominated in UAH with the carrying value of UAH 35,506 thousand (31December 2015: UAH 35,497 thousand) was received in November 2014. Refer to Note 18.

Terms and conditions of subordinated debt are regulated by the National Bank of Ukraine and are subjectto certain restrictions on interest rates.

The income and expense items with related parties for 2016 were as follows:


Significantshare-

holdersand their

closefamily

members

Entitiesunder


shareholders

Keymanagement

personneland their

close familymembers

Otherrelated

parties -individuals

Interest income 2 2,381 91Interest expense 10,190 86,158 826 1,120Reversal of provision for loan impairment - 2 - -Fee and commission income 290 24,788 81 357Fee and commission expense - 11,465 - -Administrative and other operating expenses 2,056 35,040 113 -

Remuneration of key management personnel for the year ended 31 December 2016 includes short-termemployee benefits that include salary and bonuses payable in cash amounting to UAH 41,041 thousand(2015: UAH 11,820 thousand). Short-term bonuses fall due wholly within twelve months after the end ofthe period in which management rendered the related services. Key management personnel are thoseindividuals that have the authority and responsibility for planning, directing and controlling the activities ofthe Bank directly or indirectly, and include members of the Management Board and the SupervisoryBoard.

As stated in Note 18 during 2016 the Bank has recognised in equity gain on prolongation of borrowedfunds in US dollars in the amount of UAH 1,446 thousand.

Aggregate amounts lent to and repaid by related parties during 2016 were:



and their closefamily members

Entities undercontrol of

significantshareholders

Key managementpersonnel and

their close familymembers

Amounts lent to related parties during the year 388 89,272 2,685Amounts repaid by related parties during the year (388) (90,476) (2,810)


59


At 31 December 2015, the outstanding balances with related parties were as follows:



and theirclose family

members

Entitiesunder


shareholders

Keymanagement

personnel andtheir close

familymembers

Otherrelated


Loans and advances to customersGross amount of loans and advances to

14%-24%) - 3,727 641Provision for asset transactions - 3 1

Due to other banks



Short-term loans received in USD(contractual interest rate: 6%-9.7%) - 647,256 - -

Short-term loans received in EUR(contractual interest rate: 5.8-8.5%) - 60,539 -

Short-term deposits received in EUR(contractual interest rate: 6.2%) - 118,084 -

Customer accounts

(contractual interest rate: 0%-18%) 5,589 109,147 3,430 200

(contractual interest rate: 0%-9%) 26,376 355 3,536 2,837

(contractual interest rate: 0%-7%) 21,986 371 160 12,977

(contractual interest rate: 0%) - - -

(contractual interest rate: 0%) - 70 -

(contractual interest rate: 17.5%-18%) - - 973

(contractual interest rate: 6.5%-8.5%) - - 972

(contractual interest rate: 5.5%-6.5%) - - 193

(contractual interest rate: 8%) 45,131 - -

(contractual interest rate: 16.5%) - 35,497 -

Provision for vacations 160 - 574 -

Commitments to extend credit 100 12,703 985


60


The income and expense items with related parties for 2015 were as follows:


Significantshare-

holdersand their

closefamily

members

Entitiesunder


shareholders

Keymanagement

personneland their

close familymembers

Otherrelated


Interest income - 4,646 71Interest expense 8,403 54,617 847 1,553Provision for loan impairment (income) - 1,788 24 -Fee and commission income 107 41,371 63 38Fee and commission expense - 2,052 - -

Administrative and other operating expenses 570 25,446 167 -

Aggregate amounts lent to and repaid by related parties during 2015 were:



and their closefamily members

Entities undercontrol of

significantshareholders

Key managementpersonnel and

their close familymembers

Amounts lent to related parties during the year 150 493,122 1,361Amounts repaid by related parties during the year (147) (527,566) (1,518)

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