MDM Bank. Interim Consolidated Condensed Financial Statements for the Nine-Month Period Ended 30 September 2008

Transcription

1 Interim Consolidated Condensed Financial Statements for the Nine-Month Period Ended Together with Independent Auditors Report

2 Interim Consolidated Condensed Financial Statements for the Nine-Month Period Ended Contents Independent Auditors Report Interim Consolidated Condensed Balance Sheet...1 Interim Consolidated Condensed Income Statement for the Nine-Month Period Ended...2 Interim Consolidated Condensed Income Statement for the Three-Month Period Ended...3 Interim Consolidated Condensed Cash Flow Statement...4 Interim Consolidated Condensed Statement of Changes in Equity...5 Notes to the Interim Consolidated Condensed Financial Statements 1 Organisation of the Group and its Principal Activities Operating Environment of the Group Basis of Preparation Significant Accounting Policies Cash and Cash Equivalents Loans and Advances to Customers Other Assets Impairment Losses Due to Other Banks Debt Securities in Issue Significant Exposures and Concentrations Share Capital Analysis by Segment Liquidity Risk Management Contingent Liabilities Related Party Transactions Subsequent Events...29

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9 1 Organisation of the Group and its Principal Activities These interim consolidated condensed financial statements include the financial statements of MDM Bank (Open Joint Stock Company) ( the Bank ) and its subsidiaries. MDM Bank and its subsidiaries are hereinafter collectively referred to as the Group. As at, the Group operated two banks, one bank in the Russian Federation and one in Latvia, securities trading and asset management companies and leasing companies. MDM Bank, the parent company and the lead operating entity of the Group, has been registered in the Russian Federation to carry out banking activities since The Bank operates under a general banking license issued by the Central Bank of the Russian Federation. The Bank also has broker and dealer licenses issued by the Russian Federal Financial Markets Service. MDM Bank is a member of the state deposit insurance system in the Russian Federation. The Group operates in two major business areas: Corporate and investment banking and Retail banking. The Group also has a Central treasury, which undertakes the Group s funding and certain centralised risk management activities. Refer to Note 12. The activities of the Group are conducted principally in Russia, although the Group also conducts operations on international markets. As at the number of employees of the Group was (31 December ). The Bank s registered address is: Kotelnicheskaya emb. 33 bld. 1, Moscow, Russian Federation. As at the Group has 35 branches (31 December 2007: 35). All branches are located within the Russian Federation. The Group also operates a number of sub-branches in the Russian Federation and cash exchange offices and a network of retail micro offices in Moscow. As at, the total number of points of sale of MDM Bank s network was 191 (31 December 2007: 164). As at and 31 December 2007, the Bank s parent company is ZAO Banking Holding MDM (Russia). ZAO Banking Holding MDM is a 100% subsidiary of MDM Holding SE, a European company based in Cyprus. As at and 31 December 2007, Mr. Sergey Popov was the majority beneficial shareholder of the Group with approximately 77% beneficial interest, Olivant Limited had a 9.5% beneficial interest, Mr. Martin Andersson had an 8.5% beneficial interest and the International Financial Corporation (the IFC ) had a 5.0% direct interest. In addition, Olivant Limited had an option to purchase a further 4.75% interest. Refer to Note 15 for information on related party transactions. For the purposes of these interim consolidated financial statements, key management personnel of the Group, collectively, is referred to as management. 2 Operating Environment of the Group The Russian Federation displays certain characteristics of an emerging market, including the existence of a currency that is in practice not convertible in most countries outside of the Russian Federation, relatively high inflation and strong economic growth. The banking sector in the Russian Federation is sensitive to adverse fluctuations in confidence and economic conditions and may occasionally experience reductions in liquidity. Management is unable to predict all developments which could have an impact on the banking sector and consequently what effect, if any, they could have on the financial position of the Group. 6

10 2 Operating Environment of the Group (Continued) The Russian economy is vulnerable to market downturns and economic slowdowns elsewhere in the world. The ongoing global financial crisis has resulted in capital markets instability, significant deterioration of liquidity in the banking sector, and tighter credit conditions within Russia. While the Russian Government has introduced a range of stabilization measures aimed at providing liquidity and supporting debt refinancing for Russian banks and companies, there continues to be uncertainty regarding the access to capital and cost of capital for the Group and its counterparties, which could affect the Group s financial position, results of operations and business prospects. Also, the borrowers of the Group may have been affected by the deterioration in liquidity, which could in turn impact their ability to repay the amounts due to the Group. Due to the fall in prices in global and Russian securities markets, the Group may face a significant decrease in the fair value of securities pledged as collateral against extended by the Group. To the extent that information is available, the Group has reflected revised estimates of expected future cash flows in its impairment assessment. While management believes it is taking appropriate measures to support the sustainability of the Group s business in the current circumstances, unexpected further deterioration in the areas described above could negatively affect the Group s results and financial position in a manner not currently determinable. The tax, currency and customs legislation within the Russian Federation is subject to varying interpretations, and changes, which can occur frequently. Furthermore, the need for further developments in the bankruptcy laws, the absence of formalised procedures for the registration and enforcement of collateral, and other legal and fiscal impediments contribute to the difficulties experienced by banks currently operating in the Russian Federation. The future economic direction of the Russian Federation is largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the Government, together with tax, legal, regulatory, and political developments. 3 Basis of Preparation (a) Statement of Compliance These interim consolidated condensed financial statements of the Group have been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting ( IAS 34 ). They do not include all of the information required for full financial statements, and should be read in conjunction with the consolidated financial statements of the Group for the year ended 31 December 2007, as these interim consolidated condensed financial statements provide an update of previously reported financial information. (b) Basis of Measurement These interim consolidated condensed financial statements are prepared on the historical cost basis except that financial instruments held for trading, other financial instruments held at fair value through profit or loss and available for sale financial instruments are stated at fair value, and certain classes of premises and equipment are stated at revalued amounts. (c) Presentation and Functional Currency These interim consolidated condensed financial statements are presented in Russian Roubles ( RUR ), which is the functional currency of the Bank and the majority of the Group s subsidiaries. Amounts in Russian Roubles have been rounded to the nearest million. 7

11 3 Basis of Preparation (Continued) (d) Use of Estimates and Judgements The preparation of financial statements in conformity with IAS 34 requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expense. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Although these estimates are based on management s best knowledge of current events and actions, actual results ultimately may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. In preparing these interim consolidated condensed financial statements the significant judgements made by management in applying the Group s accounting policies and the key sources of estimation uncertainty are the same as those that applied to the consolidated financial statements of the Group for the year ended 31 December Significant Accounting Policies The accounting policies applied by the Group in these interim consolidated condensed financial statements are consistent with those applied by the Group in the consolidated financial statements for the year ended 31 December 2007, except for changes resulting from the amendments to International Financial Reporting Standards ( IFRSs ). IFRS 8 Operating Segments. As at 1 January 2008, the Group has early adopted IFRS 8 Operating Segments which is effective for annual periods beginning on or after 1 January 2009 (earlier application is permitted), and related amendments to IAS 34 Interim Financial Reporting. IFRS 8 specifies how an entity should report information about its operating segments and sets out requirements for related disclosures about products and services, geographical areas and major customers. Operating segments are components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Financial information is required to be reported on the same basis as is used internally for evaluating operating segment performance and deciding how to allocate resources to operating segments. IFRS 8 Operating Segments replaces IAS 14 Segment Reporting. As a result, the Group has presented information in Note 12 Analysis by Segment in these interim consolidated condensed financial statements based on the measures of segment profit and loss, segment assets and other segment items reported to the chief operating decision maker of the Group (represented by the Management Board of MDM Bank and Chairman of the Management Board). The Group has also presented a reconciliation of the total of above measure of reportable segments profit and loss to the Group s profit and loss before tax as reported in the interim consolidated condensed financial statements, and the total of the above measure of reportable segment assets to the total assets of the Group as reported in the interim consolidated condensed financial statements. 8

12 4 Significant Accounting Policies (Continued) Further, in prior periods the Group presented information for Corporate Banking, Retail Banking, Small Business Banking, Investment Banking and Financial Markets, Private Banking and Asset Management and Central Treasury segments as reportable business segments. Starting from 1 January 2008, following a change in internal management reporting and the way how information is presented internally to the chief operating decision maker of the Group, i) Retail Banking segment now includes Small Business Banking segment; and ii) Corporate Banking, Investment Banking and Financial Markets, Private Banking and Asset Management together are included in Corporate and Investment Banking segment. The Group has accordingly amended comparative information presented in Note 12 Analysis by Segment. Reclassification of Financial Assets - Amendments to IAS 39, Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures (issued in October 2008; effective from 1 July 2008). In October 2008, the IASB issued amendments to IAS 39 Financial Instruments: Recognition and Measurement, and IFRS 7 Financial Instruments: Disclosures. The amendments to IAS 39 permit (1) certain reclassifications of non-derivative financial assets (other than those designated under the fair value option) out of the trading category if they are no longer held for the purpose of selling or repurchasing them in the near term to either the held to maturity, and receivables or available for sale categories and (2) also allow the reclassification of financial assets from the available for sale category to the and receivables category in particular rare circumstances. Rare circumstances arise from a single event that is unusual and highly unlikely to recur in the near term. Any reclassified instruments should subsequently be reviewed for impairment using the IAS 39 impairment rules for the categories into which they are classified. The amendments to IFRS 7 introduce additional disclosure requirements if an entity has reclassified financial assets in accordance with the amendments to IAS 39. The effect of application of amendment to IAS 39 by the Group is as follows: The Group has reclassified certain debt trading securities into and advances to customers. The Group identified certain corporate bonds and eurobonds eligible under the amendments (i.e. fixed maturity instruments which are not quoted in an active market), for which as at 1 July 2008 it had an intent to hold them to maturity or in the foreseeable future. Under amendments to IAS 39, the reclassifications were made with effect from 1 July 2008 at fair value at that date. The above bonds are now accounted for at amortised cost in accordance with accounting policies for and advances to customers, including assessment for impairment. The deterioration of the global and Russian financial markets during the third quarter 2008 meets the definition of rare circumstances by Amendments to IAS 39. Therefore the Group has also made the following reclassifications effective from 1 July 2008: The Group has reclassified certain debt trading securities into investment securities held to maturity. The Group identified certain corporate bonds, eligible under the amendments, for which as at 1 July 2008 it had an intention and ability to hold them to maturity. The reclassifications were made with effect from 1 July 2008 at fair value at that date. Investment securities held to maturity are accounted for at amortised cost and are assessed for impairment in accordance with IAS 39 requirements for this category. The Group has reclassified the remaining part of its debt trading securities into available-for-sale financial assets effective from 1 July 2008; as the Group no longer holds these securities for the purpose of selling or repurchasing them in the near term. From the reclassification date, the securities are revalued at fair value directly in equity through the revaluation of available-for-sale financial assets. Assessment for impairment is performed for these securities in accordance with IAS 39 requirements for available-for-sale financial assets. 9

13 4 Significant Accounting Policies (Continued) The disclosures below detail the impact of the reclassifications on the interim consolidated condensed financial statements of the Group: Carrying value Fair value Trading securities reclassified to available-for-sale financial assets Trading securities reclassified to investment securities held to maturity Trading securities reclassified to and advances to customers Recognised for reclassified assets Would have been recognized if the reclassifications were not made Interest income Gains less losses/(losses net of gains) arising from trading in securities 381 (378) Gains less losses arising from available-for-sale financial assets 15 - Provision for loan impairment (72) - Total recognised in profit for the period Revaluation of available-for-sale financial assets (354) - Total recognised in equity (354) - As of the reclassification date, effective interest rates on reclassified trading assets ranged from 7% to 23% with expected recoverable cash flows of RUR million. 5 Cash and Cash Equivalents 30 September December 2007 Cash on hand Correspondent accounts with central banks Correspondent accounts and overnight deposits with other banks Total cash and cash equivalents As at 30 June 2008, the Group has received an overnight deposit from one of its major customers of RUR million. Cash received was placed by the Group in an overnight deposit. The deposit was repaid shortly after 1 July 2008, which results in a corresponding decrease in cash and cash equivalents balance as at. 10

14 6 Loans and Advances to Customers 30 September December 2007 Loans to corporate customers Loans to individuals Investment banking Small business Net investment in finance leases Gross and advances to customers Less: loan impairment (8 773) (6 194) Net and advances to customers Movements in loan impairment by classes of to customers for the nine-month period ended are as follows: Loans to corporate Loans to customers individuals Investment banking Small business Net investment in finance leases Loan impairment as at 1 January Loan impairment losses during the period Loans written off during the period as uncollectible (43) (4) (47) Loans sold during the period (220) (584) (804) Effect of foreign currency translation Total Loan impairment as at Loans sold during the nine-month period ended comprised to corporate customers with gross book value of RUR 297 million against which is impairment allowance of RUR 220 million was recognized, which were sold for RUR 44 million, and to individuals with a gross book value of RUR 629 million against which an impairment allowance of RUR 584 million was recognized, which were sold for RUR 61 million. Movements in loan impairment by classes of to customers for the nine-month period ended 30 September 2007 are as follows: Loans to corporate Loans to customers individuals Investment banking Small business Net investment in finance leases Loan impairment as at 1 January Loan impairment losses during the period Loans written off during the period as uncollectible (87) (7) (94) Loans sold during the period (38) (38) Effect of foreign currency translation (37) (27) (1) (4) (1) (70) Total Loan impairment as at 30 September

15 6 Loans and Advances to Customers (Continued) The Group has reviewed its loan portfolio as at and recognised loan impairment as follows: Gross Impairment Net Impairment to gross (%) Loans to corporate customers Collectively assessed for impairment Standard not past due (2 263) Watch list not past due (254) Total collectively assessed for impairment (2 517) Individually assessed for impairment Watch list not past due (376) Overdue (396) Non-recoverable (1 718) Total individually assessed for impairment (2 490) Total to corporate customers (5 007) Loans to individuals Loans to individuals collectively assessed for impairment Standard to finance purchase of cars (1 119) Express to finance purchase of cars (570) Mortgage (337) Credit card overdrafts (238) Other to individuals (130) Total to individuals (2 394) Investment banking Collectively assessed for impairment Margin fully secured by traded securities Reverse sale and repurchase agreements (17) Other standard (95) Total collectively assessed for impairment (112) Individually assessed for impairment Non-recoverable 23 (23) Total individually assessed for impairment 23 (23) Total investment banking (135) Small business Collectively assessed for impairment Standard to legal entities not past due (286) Watch list to legal entities not past due 685 (25) Loans to individual entrepreneurs (189) Total collectively assessed for impairment (500) Individually assessed for impairment Watch list not past due 7 (1) Overdue 312 (90) Non-recoverable 347 (347) Total individually assessed for impairment 666 (438) Total small business (938) Net investment in finance leases Collectively assessed for impairment (30) Individually assessed for impairment (269) Total net investment in finance leases (299) Total and advances to customers (8 773)

16 6 Loans and Advances to Customers (Continued) Management of the Group believes that receivables under reverse repurchase agreements and margin, which are fully collateralised by pledge of trading securities, are not impaired. Express to finance purchase of cars are for which simplified credit approval procedures were used. The following table shows gross and advances to customers and related loan impairment, as at 31 December 2007: Gross Impairment Net Impairment to Gross (%) Loans to corporate customers Collectively assessed for impairment Standard not past due (1 345) Watch list not past due (527) Total collectively assessed for impairment (1 872) Individually assessed for impairment Watch list not past due (248) Overdue 15 (1) Non-recoverable (1 014) Total individually assessed for impairment (1 263) Total to corporate customers (3 135) Loans to individuals Loans to individuals collectively assessed for impairment Standard to finance purchase of cars (1 081) Express to finance purchase of cars (973) Mortgage (193) Credit card overdrafts (145) Other to individuals (68) Total to individuals (2 460) Investment banking Collectively assessed for impairment Margin fully secured by traded securities Reverse sale and repurchase agreements Other standard (23) Total investment banking (23) Small business Collectively assessed for impairment Standard to legal entities not past due (205) Watch list to legal entities not past due 510 (15) Loans to individual entrepreneurs (11) Total collectively assessed for impairment (231) Individually assessed for impairment Overdue 137 (62) Non-recoverable 160 (160) Total individually assessed for impairment 297 (222) Total small business (453) Net investment in finance leases Collectively assessed for impairment (32) Individually assessed for impairment (91) Total net investment in finance leases (123) Total and advances to customers (6 194)

17 6 Loans and Advances to Customers (Continued) The following table shows the ageing analysis of to individuals as at : Gross Impairment Net Impairment to Gross (%) Standard to finance purchase of cars - Not past due (42) Overdue less than 30 days 662 (44) Overdue days 249 (80) Overdue days 138 (92) Overdue days 201 (174) Overdue more than 360 days 687 (687) Total to finance purchase of cars (1 119) Express to finance purchase of cars - Not past due (10) Overdue less than 30 days 218 (15) Overdue days 96 (26) Overdue days 72 (42) Overdue days 145 (113) Overdue more than 360 days 364 (364) Total express to finance purchase of cars (570) Mortgage - Not past due (30) Overdue less than 30 days 341 (33) Overdue days 77 (33) Overdue days 72 (50) Overdue days 95 (87) Overdue more than 360 days 104 (104) Total mortgage (337) Credit card overdrafts - Not past due (11) Overdue less than 30 days 83 (12) Overdue days 36 (17) Overdue days 39 (29) Overdue days 63 (60) Overdue more than 360 days 109 (109) Total credit card overdrafts (238) Other to individuals - Not past due (33) Overdue less than 30 days 66 (12) Overdue days 27 (13) Overdue days 18 (15) Overdue days 17 (16) Overdue more than 360 days 41 (41) Total other to individuals (130) Total to individuals (2 394)

18 6 Loans and Advances to Customers (Continued) The following table shows the ageing analysis of to individuals as at 31 December 2007: Gross Impairment Net Impairment to Gross (%) Standard to finance purchase of cars - Not past due (70) Overdue less than 30 days 519 (44) Overdue days 207 (87) Overdue days 156 (120) Overdue days 276 (258) Overdue more than 360 days 502 (502) Total to finance purchase of cars (1 081) Express to finance purchase of cars - Not past due (39) Overdue less than 30 days 301 (29) Overdue days 167 (70) Overdue days 147 (104) Overdue days 301 (263) Overdue more than 360 days 468 (468) Total express to finance purchase of cars (973) Mortgage - Not past due (31) Overdue less than 30 days 161 (19) Overdue days 67 (29) Overdue days 82 (57) Overdue days 53 (47) Overdue more than 360 days 10 (10) Total mortgage (193) Credit card overdrafts - Not past due (6) Overdue less than 30 days 52 (6) Overdue days 42 (14) Overdue days 23 (15) Overdue days 34 (30) Overdue more than 360 days 74 (74) Total credit card overdrafts (145) Other to individuals - Not past due (9) Overdue less than 30 days 26 (2) Overdue days 13 (3) Overdue days 8 (4) Overdue days 12 (10) Overdue more than 360 days 40 (40) Total other to individuals (68) Total to individuals (2 460)

19 6 Loans and Advances to Customers (Continued) The table below shows the ageing analysis of to corporate customers which were individually assessed for impairment, as at : Gross Impairment Net Impairment to Gross (%) Watch list not past due (376) Overdue - Overdue less than 30 days 352 (8) Overdue from 30 to 90 days 793 (86) Overdue from 90 to 180 days 666 (264) Overdue from 180 to 360 days 124 (38) Total overdue (396) Non-recoverable - Overdue less than 360 days (1 014) Overdue more than 360 days 704 (704) Total non-recoverable (1 718) Total to corporate customers individually assessed for impairment (2 490) The table below shows the ageing analysis of to corporate customers which were individually assessed for impairment, as at 31 December 2007: Gross Impairment Net Impairment to Gross (%) Watch list not past due (248) Overdue - Overdue less than 30 days 15 (1) Total overdue 15 (1) Non-recoverable - Overdue less than 360 days 113 (113) Overdue more than 360 days 901 (901) Total non-recoverable (1 014) Total to corporate customers individually assessed for impairment (1 263)

20 6 Loans and Advances to Customers (Continued) The table below shows the ageing analysis of small business which were individually assessed for impairment, as at : Gross Impairment Net Impairment to Gross (%) Watch list not past due 7 (1) Overdue - Overdue less than 30 days 67 (7) Overdue days 103 (28) Overdue days 103 (26) Overdue days 33 (28) Overdue more than 360 days 6 (1) Total overdue 312 (90) Non-recoverable - Overdue less than 360 days 206 (206) Overdue more than 360 days 141 (141) Total non-recoverable 347 (347) Total small business individually assessed for impairment 666 (438) The table below shows the ageing analysis of small business which were individually assessed for impairment, as at 31 December 2007: Gross Impairment Net Impairment to Gross (%) Overdue - Overdue less than 30 days 54 (4) Overdue days 16 (9) Overdue days 35 (21) Overdue days 32 (28) Total overdue 137 (62) Non-recoverable - Overdue less than 360 days 128 (128) Overdue more than 360 days 32 (32) Total non-recoverable 160 (160) Total small business individually assessed for impairment 297 (222) Non-performing comprise with principal or/and interest overdue by more than 90 days and other classified as non-performing by Management. A loan is classified as non-performing by Management if it is not probable that it will be recovered through means other than repossession and subsequent realization of collateral. 17