AZERIGAZBANK JOINT-STOCK INVESTMENT BANK Condensed Interim Financial Information and Review Report 30 June 2008

Transcription

1 AZERIGAZBANK JOINT-STOCK INVESTMENT BANK Condensed Interim Financial Information and Review Report

2 CONTENTS REVIEW REPORT CONDENSED INTERIM FINANCIAL INFORMATION Condensed Interim Balance Sheet...1 Condensed Interim Income Statement...2 Condensed Interim Statement of Changes in Equity...3 Condensed Interim Statement of Cash Flows...4 Notes to the Condensed Interim Financial Information 1 Introduction Operating Environment of the Bank Basis of Preparation Accounting Policies and Critical Accounting Estimates and Judgements Cash and Cash Equivalents Loans and Advances to Customers Due to Other Banks Customer Accounts Borrowings from Government and International Financial Institutions Share Capital Interest Income and Expense Fee and Commission Income and Expense Administrative and Other Operating Expenses Dividends Segment Analysis Financial Risk Management Management of Capital Contingencies and Commitments Related Party Transactions

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5 Condensed Interim Income Statement Note Six-month period ended Six-month period ended 30 June 2007 Interest income 11 12,104 6,131 Interest expense 11 (6,084) (2,522) Net interest income 6,020 3,609 Provision for loan impairment 6 (1,544) (801) Net interest income after provision for loan impairment 4,476 2,808 Fee and commission income 12 3,469 2,204 Fee and commission expense 12 (1,179) (674) Gains less losses from trading in foreign currencies Foreign exchange translation gains less losses/(losses less gains) (49) 47 Other operating income Administrative and other operating expenses (4,715) (2,778) Share of profit of associates (11) 9 Profit before tax 2,879 2,104 Income tax expense (674) (495) Profit for the period 2,205 1,609 Earnings per share for profit attributable to the equity holders of the Bank during the year (expressed in AZN per share): - Basic Diluted The notes set out on pages 5 to 24 form an integral part of this condensed interim financial information. 2

6 Condensed Interim Statement of Changes in Equity Note Share capital Share premium Other reserves Retained earnings Total equity Balance at 1 January ,000-1,414 2,806 13,220 Fair value gains less losses on available for sale investments Income tax recorded in equity - - (15) - (15) Realised revaluation reserve on premises and equipment - - (20) 20 - Net income recognised directly in equity Profit for the period ,609 1,609 Total recognised income for the period ,629 1,664 Share issue 1, ,000 Dividends declared (1,356) (1,356) Balance at 30 June 2007 (unadited) 10,000-1,449 3,079 14,528 Fair value gains less losses on available for sale investments Income tax recorded in equity - - (15) - (15) Realised revaluation reserve on premises and equipment - - (21) 21 - Net income recognised directly in equity Profit for the period ,808 1,808 Total recognised income for the period ,829 1,861 Share issue 2, ,000 Dividends declared (45) (45) Balance at 31 December ,000-1,481 4,863 18,344 Fair value gains less losses on available for sale investments Income tax recorded in equity - - (31) - (31) Realised revaluation reserve on premises and equipment - - (21) 21 - Net income recognised directly in equity Profit for the period ,205 2,205 Total recognised income for the period ,226 2,315 Share issue 10 3, ,000 Share premium 10-6, ,860 Dividends declared (1,936) (1,936) Balance at 15,000 6,860 1,570 5,153 28,583 The notes set out on pages 5 to 24 form an integral part of this condensed interim financial information. 3

7 Condensed Interim Statement of Cash Flows Note Six-month period ended Six-month period ended 30 June 2007 Cash flows from operating activities Interest received 11,900 5,330 Interest paid (5,966) (2,455) Fees and commissions received 3,469 2,085 Fees and commissions paid (1,179) (674) Income received from trading in foreign currencies Other operating income received Staff costs paid (2,091) (1,374) Administrative and other operating expenses paid (1,828) (1,000) Income tax paid (154) (730) Cash flows from operating activities before changes in operating assets and liabilities 5,039 1,651 Changes in operating assets and liabilities Net change in due from other banks (2,343) 3,287 Net change in loans and advances to customers (34,056) (23,457) Net change in mandatory cash balances (1,457) (71) Net change in other financial assets (52) (47) Net change in other assets (16) (435) Net change in due to other banks (194) 3,543 Net change in customer accounts 24,011 1,021 Net change in debt securities in issue (10) (266) Net change in other liabilities 41 - Net change in other financial liabilities Net cash used in operating activities (8,903) (14,757) Cash flows from investing activities Acquisition of investment securities available for sale - (7,435) Proceeds from disposal and redemption of investment securities available for sale 13 11,215 Acquisition of premises and equipment (735) (609) Proceeds from disposal of premises and equipment 91 8 Acquisition of intangible assets (37) (10) Dividend income received - 21 Prepayments for premises plant and equipment (463) - Net cash provided from investing activities (1,131) 3,190 Cash flows from financing activities Proceeds from borrowings from government and international financial institutions 6,668 8,868 Repayment of borrowings from government and international financial institutions (2,716) (815) Issue of ordinary shares 10 9,860 1,000 Dividends paid 14 (1,917) (1,336) Net cash from financing activities 11,895 7,717 Effect of exchange rate changes on cash and cash equivalents (118) 27 Net decrease in cash and cash equivalents 1,743 (3,823) Cash and cash equivalents at the beginning of the period 24,305 15,056 Cash and cash equivalents at the end of the period 26,048 11,233 The notes set out on pages 5 to 24 form an integral part of this condensed interim financial information. 4

8 1 Introduction This condensed interim financial information for the six-month period ended for Azerigazbank Joint-Stock Investment Bank (the Bank ) has been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting. The Bank was incorporated and is domiciled in the Republic of Azerbaijan. The Bank is a joint stock company limited by shares and was set up in accordance with Azerbaijani regulations. Principal activity. The Bank s principal business activity is commercial and retail banking operations within the Republic of Azerbaijan. The Bank has operated under a full banking license issued by the National Bank of the Republic of Azerbaijan ( NBAR ) since January The Bank has eleven (2007: eleven) branches within the Republic of Azerbaijan. Registered address and place of business. The Bank s registered address is: Landau 16 Street AZ1073 Baku, The Republic of Azerbaijan Presentation currency. These financial statements are presented in thousands of Azerbaijani Manats ("AZN thousands"). 2 Operating Environment of the Bank The Republic of Azerbaijan displays certain characteristics of an emerging market, including the existence of a currency that is not freely convertible in most countries outside of the Republic of Azerbaijan, restrictive currency controls, relatively high inflation and economic growth. The banking sector in the Republic of Azerbaijan is sensitive to adverse fluctuations in confidence and economic conditions. The Azerbaijani economy occasionally experiences falls in confidence in the banking sector accompanied by reductions in liquidity. Management is unable to predict economic trends and developments in the banking sector and what effect, if any, a deterioration in the liquidity of or confidence in the Azerbaijani banking system could have on the financial position of the Bank. The tax, currency and customs legislation within the Republic of Azerbaijan 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 Republic of Azerbaijan. The future economic direction of the Republic of Azerbaijan is largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the Government, together with tax, legal, regulatory, and political developments. Recent volatility in global financial markets. The ongoing global liquidity crisis which commenced in the middle of 2007 has resulted in, among other things, a lower level of capital market funding, at times much higher than normal interbank lending rates, and lower liquidity levels across the Republic of Azerbaijan banking sector resulting in a significant reduction in the new number of new loans and advances made to customers, and higher funding costs where its remains possible to obtain debt finance from International Institutions or other local banks. The uncertainties in the global financial market, has also led to bank failures and bank rescues in the United States of America, Western Europe and in Russia. Such circumstances could affect the ability of the Bank to obtain new borrowings and re-finance its existing borrowings at terms and conditions similar to those applied to earlier transactions. The borrowers of the Bank may also be affected by the lower liquidity situation which could in turn impact their ability to repay their outstanding loans. Deteriorating operating conditions for borrowers may also have an impact on management's cash flow forecasts and assessment of the impairment of financial and non-financial assets. To the extent that information is available, management has reflected revised estimates of expected future cash flows in their impairment assessments. 5

9 2 Operating Environment of the Bank (Continued) Management is unable to reliably estimate the effects on the Bank's financial position of any further deterioration in the liquidity of the financial markets and the increased volatility in the currency and equity markets. Management believes it is taking all the necessary measures to support the sustainability and growth of the Bank s business in the current circumstances. 3 Basis of Preparation This condensed interim financial information has been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting. This condensed interim financial information should be read in conjunction with the annual financial statements of the Bank for the year ended 31 December This condensed interim financial information includes comparative income statement information for the six-months ended 30 June 2007 and comparative balance sheet information for the year ended 31 December At, the principal rate of exchange used for translating foreign currency monetary balances was USD 1 = AZN (31 December 2007: USD 1 = AZN ). Going concern. Management have prepared this condensed interim financial information on a going concern basis. In making this judgement, management have considered current intentions, the profitability of operations and access to financial resources. As set out in Note 16, the Bank had a cumulative negative liquidity gap in the period up to 12 months of AZN 40,092 thousand (31 December 2007: AZN 15,178 thousand). While recent global events have had a significant impact on the ability to obtain new or extended term borrowings from International Financial Institutions, and where available, the cost of funding has typically increased, management are actively managing this position and as a result of the following actions believe that the Bank will have access to sufficient resources in order to continue to meet all liabilities as they fall due: (i) as explained in Note 16, management have used a conservative basis in classifying the maturity of loan principal balances on the date of the final loan repayment, whereas in practice, repayments during the term of a loan include both principal and interest amounts. As a result management expect repayment of the loan portfolio to be accelerated in comparison with the timing of payments as recorded in Note 16; (ii) (iii) management have analysed the level of customer accounts including term deposits during the past three years and consider that this is evidence that such amounts provide a stable funding source for the Bank. As such, while the liquidity position in Note 16 records the contractual maturity dates when the amounts are repayable, management are confident that a substantial portion of the existing amounts will remain with the Bank, and new customer accounts and term deposits will continue to be attracted; and the Bank is continuing negotiations with International Financial Institutions, both current lenders to the Bank and with other parties, with an understanding that new or amended borrowing agreements will be agreed and funding in place during the next twelve months. 6

10 4 Accounting Policies and Critical Accounting Estimates and Judgements The accounting policies and methods of computation applied in the presentation of this condensed interim financial information are consistent with those disclosed in the annual financial statements of the Bank for the year ended 31 December Judgements made by management in the process of applying the accounting policies were consistent with the judgements disclosed in the annual financial statements for the year ended 31 December In addition to the judgements disclosed in the annual financial statements for the year ended 31 December 2007, management has considered whether gains or losses should arise on initial recognition of loans from governmental and international financial institutions and related lending. The Bank obtains long term financing from international financial institutions at interest rates at which such institutions ordinarily lend in emerging markets and which may be lower than rates at which the Bank could source the funds from local lenders. As a result of such financing, the Bank is able to advance funds to specific customers at advantageous rates. As the transactions are with unrelated parties, management s judgement is that these funds and the related lending are at the market interest rates and no initial recognition gains or losses should arise. In making this judgement management also considered that these instruments are a separate market segment. Management has not identified any other new areas of judgement. Critical estimates, as disclosed in the most recent annual financial statements, have not resulted in a material adjustment to the Bank s assets, income or profit during the six-month period ended. Interim period measurement. Income tax expense is recognised in this condensed interim financial information based on management s best estimate of the effective annual income tax rate expected for the full financial year. Costs that occur unevenly during the financial year are anticipated or deferred in the interim period only if it would also be appropriate to anticipate or defer such costs at the end of the financial year. Certain new IFRSs became effective for the Bank from 1 January 2008 as follows: Vesting Conditions and Cancellations Amendment to IFRS 2, Share-based Payment (issued in January 2008; effective for annual periods beginning on or after 1 January 2008). The amendment clarifies that only service conditions and performance conditions are vesting conditions. Other features of a share-based payment are not vesting conditions. The amendment specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. This amendment did not have any material impact on the condensed financial information of the Bank. Other new standards or interpretations. The Bank has adopted the following other new standards or interpretations: IFRIC 11, IFRS 2 - Bank and Treasury Share Transactions (effective for annual periods beginning on or after 1 March 2007); IFRIC 12, Service Concession Arrangements (effective for annual periods beginning on or after 1 January 2008); and IFRIC 14, IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (effective for annual periods beginning on or after 1 January 2008). These IFRICs did not significantly affect the condensed interim financial information of the Bank. The following new standards and interpretations have been published that are mandatory for the Bank s accounting periods beginning on or after 1 January 2008 or later periods and which the Bank has not early adopted: IFRS 8, Operating Segments (effective for annual periods beginning on or after 1 January 2009). The standard applies to entities whose debt or equity instruments are traded in a public market or that file, or are in the process of filing, their financial statements with a regulatory organisation for the purpose of issuing any class of instruments in a public market. IFRS 8 requires an entity to report financial and descriptive information about its operating segments and specifies how an entity should report such information. The Bank is currently assessing what impact the standard will have on segment disclosures in the financial statements. 7

11 4 Accounting Policies and Critical Accounting Estimates and Judgements (Continued) Puttable financial instruments and obligations arising on liquidation IAS 32 and IAS 1 Amendment (effective from 1 January 2009). The amendment requires classification as equity of some financial instruments that meet the definition of a financial liability. The Bank is currently assessing the impact of the amendment on its financial statements. IAS 23, Borrowing Costs (revised March 2007; effective for annual periods beginning on or after 1 January 2009). The revised IAS 23 was issued in March The main change to IAS 23 is the removal of the option of immediately recognising as an expense borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale. An entity is, therefore, required to capitalise such borrowing costs as part of the cost of the asset. The revised standard applies prospectively to borrowing costs relating to qualifying assets for which the commencement date for capitalisation is on or after 1 January The Bank is currently assessing the impact of the amended standard on its financial statements. IAS 1, Presentation of Financial Statements (revised September 2007; effective for annual periods beginning on or after 1 January 2009). The main change in IAS 1 is the replacement of the income statement by a statement of comprehensive income which will also include all non-owner changes in equity, such as the revaluation of available-for-sale financial assets. Alternatively, entities will be allowed to present two statements: a separate income statement and a statement of comprehensive income. The revised IAS 1 also introduces a requirement to present a statement of financial position (balance sheet) at the beginning of the earliest comparative period whenever the entity restates comparatives due to reclassifications, changes in accounting policies, or corrections of errors. The Bank expects the revised IAS 1 to affect the presentation of its financial statements but to have no impact on the recognition or measurement of specific transactions and balances. IAS 27, and Separate Financial Statements (revised January 2008; effective for annual periods beginning on or after 1 July 2009). The revised IAS 27 will require an entity to attribute total comprehensive income to the owners of the parent and to the non-controlling interests (previously minority interests ) even if this results in the non-controlling interests having a deficit balance (the current standard requires the excess losses to be allocated to the owners of the parent in most cases). The revised standard specifies that changes in a parent s ownership interest in a subsidiary that do not result in the loss of control must be accounted for as equity transactions. It also specifies how an entity should measure any gain or loss arising on the loss of control of a subsidiary. At the date when control is lost, any investment retained in the former subsidiary will have to be measured at its fair value. The Bank is currently assessing the impact of the amended standard on its financial statements. IFRS 3, Business Combinations (revised January 2008; effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009). The revised IFRS 3 will allow entities to choose to measure noncontrolling interests using the existing IFRS 3 method (proportionate share of the acquiree s identifiable net assets) or on the same basis as US GAAP (at fair value). The revised IFRS 3 is more detailed in providing guidance on the application of the purchase method to business combinations. The requirement to measure at fair value every asset and liability at each step in a step acquisition for the purposes of calculating a portion of goodwill has been removed. Instead, goodwill will be measured as the difference at acquisition date between the fair value of any investment in the business held before the acquisition, the consideration transferred and the net assets acquired. Acquisition-related costs will be accounted for separately from the business combination and therefore recognised as expenses rather than included in goodwill. An acquirer will have to recognise at the acquisition date a liability for any contingent purchase consideration. Changes in the value of that liability after the acquisition date will be recognised in accordance with other applicable IFRSs, as appropriate, rather than by adjusting goodwill. The revised IFRS 3 brings into its scope business combinations involving only mutual entities and business combinations achieved by contract alone. The Bank is currently assessing the impact of the amended standard on its financial statements. 8

12 4 Accounting Policies and Critical Accounting Estimates and Judgements (Continued) IFRIC 13, 'Customer loyalty programmes' (issued in June 2007; effective for annual periods beginning on or after 1 July 2008). IFRIC 13 clarifies that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multipleelement arrangement and the consideration receivable from the customer is allocated between the components of the arrangement using fair values. The Bank is currently assessing the impact of the amended standard on its financial statements. IFRIC 15, Agreements for the Construction of Real Estate (effective for annual periods beginning on or after 1 January 2009). The interpretation applies to the accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors, and provides guidance for determining whether agreements for the construction of real estate are within the scope of IAS 11 or IAS 18. It also provides criteria for determining when entities should recognise revenue on such transactions. IFRIC 16, Hedges of a Net Investment in a Foreign Operation (effective for annual periods beginning on or after 1 October 2008). The interpretation explains which currency risk exposures are eligible for hedge accounting and states that translation from the functional currency to the presentation currency does not create an exposure to which hedge accounting could be applied. The IFRIC allows the hedging instrument to be held by any entity or entities within a Bank except the foreign operation that itself is being hedged. The interpretation also clarifies how the gain or loss recycled from the currency translation reserve to profit or loss is calculated on disposal of the hedged foreign operation. Reporting entities will apply IAS 39 to discontinue hedge accounting prospectively when their hedges do not meet the criteria for hedge accounting in IFRIC 16. Improvements to International Financial Reporting Standards (issued in May 2008). In 2007, the International Accounting Standards Board decided to initiate an annual improvements project as a method of making necessary, but non-urgent, amendments to IFRS. The amendments issued in May 2008 consist of a mixture of substantive changes, clarifications, and changes in terminology in various standards. The substantive changes relate to the following areas: classification as held for sale under IFRS 5 in case of a loss of control over a subsidiary; possibility of presentation of financial instruments held for trading as noncurrent under IAS 1; accounting for sale of IAS 16 assets which were previously held for rental and classification of the related cash flows under IAS 7 as cash flows from operating activities; clarification of definition of a curtailment under IAS 19; accounting for below market interest rate government loans in accordance with IAS 20; making the definition of borrowing costs in IAS 23 consistent with the effective interest method; clarification of accounting for subsidiaries held for sale under IAS 27 and IFRS 5; reduction in the disclosure requirements relating to associates and joint ventures under IAS 28 and IAS 31; enhancement of disclosures required by IAS 36; clarification of accounting for advertising costs under IAS 38; amending the definition of the fair value through profit or loss category to be consistent with hedge accounting under IAS 39; introduction of accounting for investment properties under construction in accordance with IAS 40; and reduction in restrictions over manner of determining fair value of biological assets under IAS 41. Further amendments made to IAS 8, 10, 18, 20, 29, 34, 40, 41 and to IFRS 7 represent terminology or editorial changes only, which the IASB believes have no or minimal effect on accounting. The Bank is currently assessing the impact of the amended standard on its financial statements. 9

13 4 Accounting Policies and Critical Accounting Estimates and Judgements (Continued) Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate IFRS 1 and IAS 27 Amendment (revised May 2008; effective for annual periods beginning on or after 1 January 2009). The amendment allows first-time adopters of IFRS to measure investments in subsidiaries, jointly controlled entities or associates at fair value or at previous GAAP carrying value as deemed cost in the separate financial statements. The amendment also requires distributions from pre-acquisition net assets of investees to be recognised in profit or loss rather than as a recovery of the investment. The amendments will not have an impact on the Bank s financial statements. Eligible Hedged Items Amendment to IAS 39, Financial Instruments: Recognition and Measurement (effective with retrospective application for annual periods beginning on or after 1 July 2009, with earlier application permitted). The amendment clarifies how the principles that determine whether a hedged risk or portion of cash flows is eligible for designation should be applied in particular situations. The amendment is not expected to have an impact on the Bank's financial statements. Unless otherwise described above, the new standards and interpretations are not expected to significantly affect the Bank s financial statements. 5 Cash and Cash Equivalents 31 December 2007 Cash on hand 10,909 8,393 Cash balances with the NBAR (other than mandatory reserve deposits) 1,538 6,808 Correspondent accounts and overnight placements with other banks - Republic of Azerbaijan Other countries 13,371 8,827 Total cash and cash equivalents 26,048 24,305 Included in correspondent accounts and overnight placements with other banks are placements with three non-resident banks in the amount of AZN 6,370 thousand, AZN 3,642 thousand and AZN 3,022 thousand (AZN 3,910 thousand, AZN 2,134 thousand and AZN 23 thousand) at an interest rate of %, 2.75% and % p.a. respectively (31 December 2007: 3.5%, 2.5% and 2.5%, p.a. respectively). 10

14 6 Loans and Advances to Customers 31 December 2007 Corporate loans 69,559 53,984 Loans to individuals consumer loans 49,188 34,562 Loans to individuals entrepreneurs 3,856 5,591 Mortgage loans 14,315 8,820 Car purchase 4,509 4,813 State and municipal organisations Other 3,860 2,690 Less: Provision for loan impairment (4,836) (3,292) Total loans and advances to customers 140, ,866 Movements in the provision for impairment of loans to customers are, as follows: In thousands of Azerbaijani Manats Corporate loans Loans to individuals - consumer loans Loans to individualsentrepreneurs Mortgage loans Car purchase State and municipal organisations Other Total Provision for loan impairment as at 1 January , ,975 Provision/ (Recovery of provision) for impairment during the period (13) 35 (45) Amounts written off during the period as uncollectible - (50) - - (50) - - (100) Provision for loan impairment as at 30 June , ,676 Provision/ (Recovery of provision) for impairment during the period (38) (8) Provision for loan impairment as at 31 December ,445 1, ,292 Provision/ (Recovery of provision) for impairment during the period 1, (67) (18) 62 1,544 Amounts written off during the period as uncollectible Provision for loan impairment as at 2,649 1, ,836 11

15 6 Loans and Advances to Customers (Continued) Economic sector risk concentrations within the customer loan portfolio are, as follows: 31 December 2007 Amount % Amount % Individuals 75,754 52% 53,786 48% Trade and services 29,975 21% 17,945 16% Manufacturing 18,850 13% 18,132 16% Construction 9,579 7% 7,524 7% Agriculture 8,064 5% 6,913 6% Transportation 1,711 1% 3,470 3% State and municipal 132-2,690 3% Other 1,354 1% 698 1% Total loans and advances to customers (before impairment) 145, % 111, % 7 Due to Other Banks 31 December 2007 Short- term placements of other banks 6,457 12,140 Correspondent accounts and overnight placements of other banks 6, Total due to other banks 12,637 12,902 At, short term deposits of a resident banks include three deposits (31 December 2007: four deposits) received from resident banks at interest rates ranging between 2%-16% per annum (31 December 2007: nil). Carrying value of each class of due to other banks approximates fair value at and 31 December At the estimated fair value of due to other banks was AZN 12,637 thousand (31 December 2007: AZN 12,902 thousand). 12

16 8 Customer Accounts 31 December 2007 State and public organisations - Current/settlement accounts Term deposits Other legal entities - Current/settlement accounts 21,700 15,966 - Term deposits 20,483 20,475 Individuals - Current/demand accounts 21,124 17,405 - Term deposits 55,534 40,825 Accrued interest payable Total customer accounts 120,257 96,115 Economic sector concentrations within customer accounts are, as follows: 31 December 2007 Amount % Amount % Individuals 77, % 58, % Financial services 16, % 16, % Trade and services 20, % 14, % Insurance 3, % 4, % Construction % % Government bodies % % Transportation % % Energy % % Manufacturing % % Agriculture % % Other % % Total customer accounts 120, % 96, % At, the estimated fair value of customer accounts was AZN 120,257 thousand (31 December 2007: AZN 96,115 thousand). 9 Borrowings from Government and International Financial Institutions 31 December 2007 Funds borrowed from the National Fund for Support of Entrepreneurship of the Republic of Azerbaijan 14,248 12,072 Borrowings from government and International financial institutions for Reconstruction and Development (EBRD) 6,696 4,818 Funds borrowed from International Finance Corporation (IFC) 3,003 2,874 Funds borrowed from Asian Development Bank (ADB) 2,143 3,230 Funds borrowed from Azerbaijan Mortgage Fund 1, Funds borrowed from German-Azerbaijan Fund (GAF) Accrued interest payable Total borrowings from government and international financial institutions 28,621 24,601 13

17 9 Borrowings from Government and International Financial Institutions (Continued) The carrying value of each class of borrowings from government and international financial institutions approximates fair value at and 31 December At, the estimated fair value of borrowings from government and international financial institutions was AZN 28,511 thousand (31 December 2007: AZN 14,563 thousand). Excluding the National Fund for Support of Entrepreneurship of the Republic of Azerbaijan, the market interest rates for all other borrowings range between 7% and 10% per annum for the 6 months period ended, (7% and 10% per annum for the year ended 31 December 2007). During the period ended, the Bank failed to comply with certain financial covenants imposed by international financial institutions. Refer to Note Share Capital In thousands of AZN except for number of shares Number of ordinary shares in thousands Number of preference shares in thousands Nominal value of ordinary shares Nominal value of preference shares Share premium Total At 1 January , , ,000 New shares issued 1,500-3, ,000 Conversion of preference shares to ordinary shares 300 (300) 600 (600) - - At 31 December ,000-12, ,000 New shares issued 1,500-3,000-6,860 9,860 At 7,500-15,000-6,860 21,860 All ordinary shares have a nominal value of AZN 2 per share (2007: AZN 2 per share) and rank equally. Each share carries one vote. At, individuals and legal entities own 71% and 29%, respectively, of the total share capital of the Bank (31 December 2007: 81% and 19%). On 5 May 2008, a Share Subscription Agreement was signed whereby Kazimir Investment Limited purchased 750 thousand ordinary shares and paid a share premium of AZN 6,860 thousand. On 3 December 2007, a decision was made by the Supervisory Board of the Bank to increase the number of shares in issue to 7,500 thousand with the additional issue of 1,500 thousand shares at a nominal value of AZN 2 per share. In addition, share premium to AZN 6,860 thousand was created as a result of the 750 thousand ordinary shares issued to Kazimir Investments Limited. The new shares were fully paid on 12 May 2008 and formally registered at the State Securities Committee.. 14

18 11 Interest Income and Expense Six-month period ended Six-month period ended 30 June 2007 Interest income Loans and advances to customers 11,828 5,773 Due from other banks Correspondent accounts with other banks Debt investment securities available for sale 3 38 Total interest income 12,104 6,131 Interest expense Term deposits of individuals 3,235 1,701 Borrowings from government and International financial institutions for Reconstruction and Development (EBRD) 1, Term deposits of legal entities Term placements of other banks Debt securities in issue Correspondent accounts of other banks Total interest expense 6,084 2,522 Net interest income 6,020 3, Fee and Commission Income and Expense Six-month period ended Six-month period ended 30 June 2007 Fee and commission income - Plastic card operations Transactions with foreign currencies Guarantees issued Cash collection Servicing customers accounts Settlement transactions Total fee and commission income 3,469 2,204 Fee and commission expense - Plastic card operations Servicing corresponding accounts Guarantees issued International financial institutions Cash collection Total fee and commission expense 1, Net fee and commission income 2,290 1,530 15

19 13 Administrative and Other Operating Expenses Six-month period ended Six-month period ended 30 June 2007 Staff costs 2,344 1,374 Advertising and marketing services Depreciation of premises and equipment Rent expenses Security services Other costs of premises and equipment Communication Stationery and supplies Business travel Utilities Taxes other than on income Insurance expense Amortisation of software and other intangible assets Professional services Other Total administrative and other operating expenses 4,715 2, Dividends 31 December 2007 Ordinary Preference Ordinary Preference Dividends payable at 1 January Dividends declared during the period 1,936-1, Dividends paid during the period (1,917) - (1,285) (51) Dividends payable at the period end Dividends per share declared during the period All dividends are declared and paid in Azerbaijani Manats. 15 Segment Analysis The Bank s primary format for reporting segment information is business segments. Business Segments. The Bank is organised on a basis of two main business segments: Retail banking representing private banking services, private customer current accounts, savings, deposits, investment savings products, custody, credit and debit cards, consumer loans and mortgages. Corporate banking representing direct debit facilities, current accounts, deposits, overdrafts, loan and other credit facilities, foreign currency and derivative products. There are no other material items of income or expense between the business segments. Segment assets and liabilities comprise operating assets and liabilities, being the majority of the balance sheet, but excluding taxation. 16

20 15 Segment Analysis (Continued) Segment information for the main reportable business segments of the Bank for the six-month reporting periods ended and 30 June 2007 is set out below: In thousands of Azerbaijani Retail banking Corporate banking Total Manats Total segment revenues 8,124 3,800 7,511 4,882 15,635 8,682 Total revenues comprise: - Interest income 6,529 2,620 5,575 3,511 12,104 6,131 - Fee and commission income 1,595 1,170 1,874 1,352 3,469 2,522 - Other operating income Total revenues 8,124 3,800 7,511 4,882 15,635 8,682 Segment result 1, ,506 2,113 1,931 Unallocated Share of after tax results of associates (11) 9 Profit before tax 2,879 2,104 Income tax expense (674) (495) Profit for the period 2,205 1,609 Other segment items Capital expenditure (316) (311) (328) (298) (644) (609) Depreciation and amortisation expense (244) (195) (310) (219) (554) (414) Other non-cash income and expense items (541) (365) (635) (436) (1,176) (801) In thousands of Azerbaijani Manats Retail banking Corporate banking Total 30 June 30 June 31 December December June December 2007 Total segment assets 95,705 78,408 99,510 77, , ,107 Investments in associates Current income tax prepayment Total assets 195, ,778 Total segment liabilities 76,574 59,243 89,892 78, , ,159 Current and deferred income tax liability Total liabilities 166, ,434 17

21 16 Financial Risk Management The following table shows the carrying amounts of financial assets and financial liabilities of the Bank as at on the basis of the remaining period from the balance sheet date to their contractual maturity date. Demand and less than 1 month From 1 to 3 months From 3 to 12 months From 1 to 5 years Over 5 years Total Assets Cash and cash equivalents 26, ,048 Mandatory cash balances with the NBAR 6, ,083 Due from other banks ,921-4,386 Loans and advances to customers 9,042 4,131 30,539 91,189 5, ,583 Investment securities available for sale Other financial assets Total financial assets 41,920 5,046 31,030 94,221 5, ,899 Liabilities Due to other banks 7,825 4, ,637 Customer accounts 47,578 5,706 38,779 28, ,257 Debt securities in issue ,027-3,276 Borrowings from government and International financial institutions for Reconstruction and Development (EBRD) 12, ,341 4,050 28,621 Other financial liabilities Total financial liabilities 68,542 10,518 39,028 43,508 4, ,700 Net liquidity gap at (26,622) (5,472) (7,998) 50,713 1,578 12,199 Cumulative liquidity gap at 30 June 2008 (26,622) (32,094) (40,092) 10,621 12,199 For loans and advances to customers, as a result of more detailed information not being readily available within the Bank s accounting system, management have used a conservative basis in classifying the maturity of loan principal balances on the date of the final loan repayment. In practice, repayments during the term of a loan are typically monthly and include interest payments and the part repayment of the principal amount. As a result, management expect repayment of the loan portfolio to be accelerated in comparison with the timing of payments as recorded in the above table. Management have analysed the level of customer accounts including term deposits during the past three years and consider that this is evidence that such amounts provide a stable funding source for the Bank. This includes over AZN 18 million of term deposits placed by the significant shareholders of the Bank as detailed in Note 19. As such, while the liquidity position records the contractual maturity dates when the amounts are repayable, management are confident that a substantial portion of the existing amounts will remain with the Bank, and new customer accounts and term deposits will continue to be attracted. 18

22 17 Management of Capital The objectives of management when managing the Bank s capital are (i) to comply with the capital requirements set by the NBAR, (ii) to safeguard the Bank s ability to continue as a going concern and (iii) to maintain a sufficient capital base to achieve a capital adequacy ratio based on Basel Accord of at least 8%. Compliance with capital adequacy ratios set by the NBAR is monitored monthly with reports outlining their calculation reviewed and signed by the Bank s Chairman of Supervisory Board, Head of Audit Committee, Chief Executive Officer, Chief Accountant and Head of Internal Audit Department. The other objectives of capital management are evaluated annually. Under the current capital requirements set by the NBAR banks have to: (a) hold the minimum level of total statutory capital of AZN 10,000 thousand (31 December 2007: AZN 10,000 thousand); (b) maintain a ratio of regulatory capital to risk weighted assets ( statutory capital ratio ) at or above a prescribed minimum of 12% (31 December 2007: 12%) and (c) maintain a ratio of tier-1 capital to the risk-weighted assets (the Tier-1 capital ratio ) at or above the prescribed minimum of 6% (31 December 2007: 6%). For the NBAR statutory capital adequacy purposes the amount of the cumulative capital that the Bank manages as at is AZN 29,009 thousand (31 December 2007: AZN 18,232 thousand). Management consider that the Bank was in compliance with the statutory capital ratio during the six-month period ended. The Bank is also subject to minimum capital requirements established by covenants stated in loan agreements, including capital adequacy levels calculated in accordance with the requirements of the Basle Accord, as defined in the International Convergence of Capital Measurement and Capital Standards (updated April 1998) and Amendment to the Capital Accord to incorporate market risks (updated November 2005), commonly known as Basel I. The composition of the Bank s capital calculated in accordance with Basel Accord is as follows: 31 December 2007 Tier 1 capital Share capital 15,000 12,000 Share premium 6,860 - Retained earnings 5,153 4,863 Less: intangible assets (290) (275) Total tier 1 capital 26,723 16,588 Tier 2 capital Reserves 1, Revaluation reserve available for sale instruments Revaluation reserve premises and equipment 1,290 1,309 Total tier 2 capital 3,116 2,282 Less: Investments Total regulatory capital 29,325 18,484 Risk-weighted assets: On-balance sheet 153, ,036 Off-balance sheet 10,420 14,168 Total risk-weighted assets 163, ,204 Basel ratio 17.90% 13.18% Management considers that the Bank has complied with all externally imposed capital requirements throughout the six-month period ended. 19

23 18 Contingencies and Commitments Legal proceedings. From time to time and in the normal course of business, claims against the Bank are received. Based on its own estimates and both internal and external professional advice the management is of the opinion that no material losses will be incurred in respect of claims and, accordingly, no provision has been made in this condensed interim financial information. Tax legislation. Azerbaijani tax, currency and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management s interpretation of such legislation as applied to the transactions and activity of the Bank may be challenged by the relevant regional and state authorities. Recent events within the Republic of Azerbaijan suggest that the tax authorities may be taking a more assertive position in their interpretation of the legislation and assessments, and it is possible that transactions and activities that have not been challenged in the past may be challenged. As a result, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods. Management have assessed whether capital transactions involving the Bank's own shares may give rise to non-sales income in the hands of the Bank that is subject to income tax in accordance with the Tax Code of the Republic of Azerbaijan. Management firmly believe that such transactions, for example, the issuance by the Bank of new shares giving rise to share premium, are not within the scope of the Tax Code and therefore not required to be included in the Bank's income tax calculation. Accordingly, the Bank has not paid or accrued any income tax in relation to such transactions that have resulted in a total share premium amount of AZN 6,860 thousand as at (31 December 2007: nil). If the Ministry of Taxes of the Republic of Azerbaijan will explicitly require the Bank to pay tax with regard to capital gains resulting from capital transactions involving the Bank's own shares, i.e. share premium, then the Bank will have to pay AZN 1,509 thousand in relation to the share premium arising during the period ended. Management believes that its interpretation of the relevant legislation is appropriate and the Bank s tax, currency legislation and customs positions will be sustained. Accordingly, at no provision for potential tax liabilities has been recorded (31 December 2007: no provision). Capital expenditure commitments. At, the Bank does not have material contractual capital expenditure commitments. (31 December 2007: no capital expenditure commitments). Operating lease commitments. At, the Bank had no significant commitments in respect of non-cancellable operating leases (31 December 2007: nil). Compliance with covenants. The Bank is subject to certain covenants related primarily to its borrowings. Non-compliance with such covenants may result in negative consequences for the Bank, including growth in the cost of borrowings and the timing of repayment of existing facilities. Management believes that during the period ended the Bank has materially complied with the covenants that were in force, except as detailed below. At certain times during the period ended and as at, the Bank failed to comply with financial covenants related to the loans in arrears exposure to the gross loan portfolio and net fixed tangible and intangible assets to available capital which are specified in loan agreements with certain lenders to the Bank. No actions have been undertaken or penalties charged by the related financial institutions. The borrowings affected by breach of the covenants of the Bank as at was AZN 12,189 thousand (31 December 2007: nil). In accordance with those loan agreements where covenants are breached, including under cross-default clauses where a breach in a separate loan agreement also constitutes a breach of that loan agreement, provision is made for the borrowings to become due and/or repayable on demand. As at, the borrowings impacted have been reclassified to being on demand within this interim financial information. Management believe that as of the date of this report, the Bank had not experienced any adverse consequences of the breaches of the covenants specified in these loan agreements. 20

24 18 Contingencies and Commitments (Continued) Credit related commitments. The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet its obligations to third parties. Documentary and commercial letters of credit, which are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods, to which they relate, or cash deposits and, therefore, carry less risk than a direct borrowing. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments since most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Bank s monitors the term to maturity of credit related commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments. Outstanding credit related commitments are as follows: 31 December 2007 Cancellable undrawn credit lines 6,335 4,901 Import letters of credit 4,020 6,241 Guarantees issued 8,410 11,047 Total credit related commitments 18,765 22,189 The total outstanding contractual amount of undrawn credit lines, letters of credit, and guarantees does not necessarily represent future cash requirements, as these financial instruments may expire or terminate without being funded. Fair value of credit related commitments was AZN 502 thousand at (31 December 2007: AZN 453 thousand). 19 Related Party Transactions Parties are generally considered to be related if the parties are under common control or one party has the ability to control the other party or can exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. Included in the Other related parties column within this note are related parties falling within the definition of IAS 24, Related Party Transactions, including transactions with entities over which the Bank s key management or shareholders have control or significant influence. At, the outstanding balances with related parties were as follows: 21