AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 CONTENTS
Auditors’ Report
2
Report of the Management Board
3
Report of the Supervisory Board
4
The Supervisory Board and the Management Board
5
Statement of Management Responsibility
6
Financial Statements: Income Statement
7
Statement of Comprehensive Income
8
Statement of Financial Position
9
Statement of Cash Flows
10
Statement of Changes in Equity
11
Notes to the Financial Statements
12-53
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1
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 AUDITORS’ REPORT INDEPENDENT AUDITORS’ REPORT To the Shareholder of “UniCredit Finance” AS: Report on the Financial Statements We have audited the accompanying financial statements of “UniCredit Finance” AS (previously “UniCredit Bank” AS) (further “the Bank”) set out on pages 7 to 53, which comprise the Bank’s statement of financial position as of 31 December 2013, and income statement, statements of comprehensive income, statements of changes in equity and statements of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards as adopted by the European Union, 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. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above give a true and fair view of the financial position of the Bank as of 31 December 2013, and of their financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union. Report on Other Legal and Regulatory Requirements We have read the management board report for 2013 set out on page 3 of the accompanying annual report for the year ended 31 December 2013 and have not identified any material inconsistencies between the financial information contained in the management board report and the financial statements for 2013. Deloitte Audits Latvia SIA Licence No. 43
Roberts Stuģis Member of the Board
Inguna Staša Certified auditor of Latvia Certificate No. 145
Riga, Latvia 24 February 2014
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2
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 REPORT OF THE MANAGEMENT BOARD On 17 January 2013 the Supervisory Board of the Bank approved the Bank`s Strategic plan for Centralization of its activities in the Baltic countries. Considering the above stated, the Bank’s shareholder decided to narrow its geographical presence in the Baltic region centralizing the activities of AS UniCredit Bank in Latvia. All operational activities of the branches of AS UniCredit Bank in Lithuania and Estonia were discontinued according to an agreed action plan. On 8 May 2013 the sole Shareholder of the Bank approved the Bank’s Strategic plan on ‘De-licensing of AS UniCredit Bank with further merger with SIA UniCredit Leasing’ that foresaw a further narrowing of UniCredit presence in Baltic market and its exit from the banking sector. On 31 August 2013 the liquidation of the AS UniCredit Bank Lithuania Branch and AS UniCredit Bank Estonian Branch was started. The Bank discontinued providing new banking services and performing operational activities in the whole territory of Baltics as of 20 September 2013. On 24 October 2013 the Bank concluded an agreement with AS Swedbank (Latvia), Swedbank AB (Lithuania) and Swedbank AS (Estonia) ensuring that remaining customer deposits, part of guarantees, letters of credit and selected loans are further managed by a licensed credit institution in all 3 countries. Financial and Capital Market Commission approved the transactions on 21 November 2013. Consequently on 12 December 2013 the Financial and Capital Market Commission allowed the Bank to annul the Credit Institution license from 1 January 2014. As a result of the above mentioned exit strategy on banking activities intensified efforts to work out non-performing Loans and to improve the Loan portfolio quality were carried out. At the year end gross loans and receivables decreased to LVL 115 million. Term deposits due to credit institutions were at LVL 93.1 million whereas all Deposits from non-banking customers were repaid fully at the end of the year. The Bank ended the year with a net loss amounting to LVL 7.8 million. Following the de-licensing the company`s name was changed to AS UniCredit Finance and the company intends to manage the remaining customer loans until merger with SIA UniCredit Leasing. The Bank’s staff as of 31 December 2013 consisted of 68 employees. On behalf of the Management Board we thank all our employees for their contribution as well as our customers and partners for successful cooperation through the challenging year 2013.
Günter Friedl Member of the Management Board Riga, 24 February 2014
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3
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 REPORT OF THE SUPERVISORY BOARD
In 2013 the Bank ensured full compliance with regulating requirements and provided banking services for its existing customers in order to successfully realize exit strategy of the market. On behalf of the shareholders, we herewith thank the Management Board and the employees for their commitment and contribution to the Bank in 2013. The Supervisory Board fulfilled the duties conferred to it by law and the Articles of Association and advised the Bank’s management on an ongoing basis during the accounting period. For this purpose, it requested and received information on the Bank’s business performance, above all with respect to liquidity, assets and earnings. The Bank’s financial statements as at 31 December 2013, which are endorsed in full by the Supervisory Board, were audited by the elected auditors Deloitte Audits Latvia SIA. We expect that 2014 due to the reorganization of the company will be as challenging year as 2013, but we are aware that this strategic decision of the Group will bring efficiencies in terms of balance sheet and liquidity management.
Gianfranco Bisagni Chairman of the Supervisory Board
Riga, 24 February 2014
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4
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 THE SUPERVISORY BOARD AND THE MANAGEMENT BOARD
The Supervisory Board in 2013 Name
Position
Gianfranco Bisagni
Chairman of the Supervisory Board
Date of appointment / resignation reappointed on 21 May, 2012
Martin Klauzer
Deputy Chairman of the Supervisory Board
appointed on 21 May, 2012
Friederike Kotz
Member of the Supervisory Board
reappointed on 21 May, 2012
Irene Grzybowski
Member of the Supervisory Board
reappointed on 21 May, 2012
Simonetta Iarliori
Member of the Supervisory Board
reappointed on 21 May, 2012
Mariya Lerch
Member of the Supervisory Board
appointed on 6 March, 2013
Silvestri Silvano
Member of the Supervisory Board
appointed on 21 May, 2012, resigned on 6 March, 2013
The Supervisory Board changes in 2014 Name
Position
Date of appointment / resignation
Gianfranco Bisagni
Chairman of the Supervisory Board
reappointed on 1 January, 2014
Martin Klauzer
Deputy Chairman of the Supervisory Board
reappointed on 1 January, 2014
Mariya Lerch
Member of the Supervisory Board
reappointed on 1 January, 2014
Friederike Kotz
Member of the Supervisory Board
reappointed on 21 May, 2012, resigned on 1 January, 2014
Irene Grzybowski
Member of the Supervisory Board
reappointed on 21 May, 2012, resigned on 1 January, 2014
Simonetta Iarliori
Member of the Supervisory Board
reappointed on 21 May, 2012, resigned on 1 January, 2014
The Management Board in 2013 Name
Position
Algimantas Kundrotas
Chairman of the Management Board
Date of appointment / resignation appointed on 22 June, 2012
Günter Friedl
Member of the Management Board
reappointed on 1 April, 2013
The Management Board changes in 2014 Name
Position
Date of appointment / resignation
Algimantas Kundrotas
Chairman of the Management Board
resigned on 1 January, 2014
Günter Friedl
Member of the Management Board
reappointed on 1 April, 2013
Gianfranco Bisagni Chairman of the Supervisory Board
Günter Friedl Member of the Management Board
Riga, 24 February 2014
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AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 STATEMENT OF MANAGEMENT RESPONSIBILITY The Supervisory Board and the Management Board (Management) of AS “Unicredit Finance” (previously AS “UniCredit Bank”) (further - the Bank) are responsible for preparing the financial statements and the annual report of the Bank. The financial statements on pages 7-53 present fairly the financial position of the Bank as at 31 December 2013, the results of its operations and cash flows for the year then ended, in accordance with International Financial Reporting Standards as adopted by the European Union. The Management confirms that appropriate accounting policies have been used and that those policies have been applied consistently. Reasonable and prudent judgment and estimates have been made in the preparation of the Bank’s financial statements and the annual report. The Management also confirms that Bank’s financial statements have been prepared on a going concern basis in accordance with International Financial Reporting Standards as adopted by the European Union and that they comply with the Financial and Capital Market Commission’s Regulations on Annual Reports of Banks. The Management of the Bank is responsible for keeping proper accounting records, for taking reasonable steps to safeguard the assets of the Bank and to prevent and detect fraud and other irregularities. It is also responsible for operating the Bank in compliance with the Law on Credit Institutions and other legislation of the Republic of Latvia including regulations of the Bank of Latvia and the Financial and Capital Market Commission.
On behalf of the Management of the Bank:
Gianfranco Bisagni Chairman of the Supervisory Board
Günter Friedl Member of the Management Board
Riga, 24 February 2014
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AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 INCOME STATEMENT Note
2013 ’000 LVL
2012 ’000 LVL
Interest income
8
10,399
18,515
Interest expense
9
(4,187)
(8,638)
6,212
9,877
Net interest income Fee and commission income
10
1,065
2,242
Fee and commission expense
11
(221)
(422)
844
1,820
11
8
835
1,502
518
70
Other expenses
(369)
(223)
Operating income
8,051
13,054
Net fee and commission income Net profit from held-for-trading financial assets and financial liabilities Net foreign exchange income
12
Other income
Impairment losses, net
13
(5,664)
(3,428)
General administrative expenses
14
(10,175)
(8,432)
(7,788)
1,194
-
-
(7,788)
1,194
Profit/(loss) before income tax Income tax expense/(benefit)
15
Profit/ (loss) for the year
The financial statements on pages 7 - 53 have been authorized for issue by the Supervisory Board and the Management board on 24 February 2014 and signed on their behalf by:
Gianfranco Bisagni Chairman of the Supervisory Board
Günter Friedl Member of the Management Board
The accompanying notes on pages 12 - 53 are an integral part of these financial statements.
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7
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 STATEMENT OF COMPREHENSIVE INCOME
2013 ’000 LVL
2012 ’000 LVL
(7,788)
1,194
Net change in fair value of available-for-sale financial assets
(248)
280
Other comprehensive income/ (loss) for the year
(248)
280
Total comprehensive income/ (loss) for the year
(8,036)
1,474
Profit/ (loss) for the year Other comprehensive income/ (loss)
The financial statements on pages 7 - 53 have been authorized for issue by the Supervisory Board and the Management board on 24 February 2014 and signed on their behalf by:
Gianfranco Bisagni Chairman of the Supervisory Board
Günter Friedl Member of the Management Board
The accompanying notes on pages 12 - 53 are an integral part of these financial statements.
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8
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 STATEMENT OF FINANCIAL POSITION Note ASSETS Cash and balances with the Bank of Latvia Demand balances due from credit institutions Held-to-maturity investments Loans and receivables: - Term deposits due from credit institutions - Loans due from non-banking customers Held-for-trading financial assets - Derivative financial instruments Available-for-sale financial assets: - Debt securities Property and equipment Intangible assets Other assets Total Assets
LIABILITIES Demand balances due to credit institutions Held-for-trading financial liabilities - Derivative financial instruments Financial liabilities at amortised cost - Term deposits due to credit institutions - Deposits from non-banking customers - Subordinated liabilities Provisions Other liabilities Total Liabilities EQUITY Share capital Revaluation reserve from available-for-sale financial instruments Accumulated losses Total Equity
31.12.2012 ’000 LVL
16 17 18
55,272 3,644 -
20,838 87,899 3,124
17 19
74 86,701
2,824 429,000
20
-
282
22 23 23 24
54 62 1,302 147,109
28,512 271 1,011 715 574,476
25
-
11,186
20
-
1,023
25 26 30 31 27
93,145 85 2,131 95,361
184,846 294,169 17,457 3,366 2,645 514,692
29
86,100 (34,352) 51,748
86,100 248 (26,564) 59,784
147,109
574,476
6,070
283,153
Total Liabilities and Equity 38
Commitments and Contingencies
31.12.2013 ’000 LVL
The financial statements on pages 7 - 53 have been authorized for issue by the Supervisory Board and the Management board on 24 February 2014 and signed on their behalf by:
Gianfranco Bisagni Chairman of the Supervisory Board
Günter Friedl Member of the Management Board
The accompanying notes on pages 12 - 53 are an integral part of these financial statements.
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9
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 STATEMENT OF CASH FLOWS 2013 ’000 LVL
2012 ’000 LVL
(7,788) 434 1,401 (3,281) 810 (8,424)
1,194 1,028 1,530 911 49 4,712
340,898 2,750 28,264 (741) (587)
27,666 13,670 (14,025) 992 1,334
(294,169) (110,709) (514) (43,232)
58,807 (53,043) (234) 39,879
(43,232)
153 40,032
(78) 3,124 3,046
(212) (212)
Cash flow from used in financing activities Decrease in subordinated debt Decrease in cash and cash equivalents used in financing activities
(17,457) (17,457)
-
Increase/ (decrease) in cash and cash equivalents
(57,643)
39,820
63,829
24,009
6,186
63,829
Note Cash inflow from operating activities Profit/ (loss) before income tax Depreciation and amortization Impairment losses on loans and receivables (net) Provisions (other) Property and equipment disposal result Cash and cash equivalents from operating activities before changes in operating assets and liabilities
23
Decrease in loans due from non-banking customers Decrease in due from credit institutions (Increase)/ decrease in available-for-sale financial assets (Increase)/ decrease in derivative financial instruments (Increase)/ decrease in other assets Increase/ (decrease) in deposits from non-banking customers Increase/ (decrease) in due to credit institutions Decrease in other liabilities Increase/ (decrease) in cash and cash equivalents from operating activities before income tax Received income tax Increase/ (decrease) in cash and cash equivalents from operating activities Cash flow from investing activities Purchase of property, equipment and intangible assets Sell and mature of held to maturity investments Increase/ (decrease) in cash and cash equivalents from investing activities
Cash and cash equivalents at the beginning of the year 32
Cash and cash equivalents at the end of the year
The financial statements on pages 7 - 53 have been authorized for issue by the Supervisory Board and the Management board on 24 February 2014 and signed on their behalf by:
Gianfranco Bisagni Chairman of the Supervisory Board
Günter Friedl Member of the Management Board
The accompanying notes on pages 12 - 53 are an integral part of these financial statements.
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AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 STATEMENT OF CHANGES IN EQUITY
’000 LVL
Revaluation reserve ’000 LVL
Retained earnings/ (Accumulated losses) of previous years ’000 LVL
Profit/ (loss) for the year ’000 LVL
Total equity ’000 LVL
86,100
(32)
(26,742)
(1,016)
58,310
-
280
-
1,194 -
1,194 280
Share capital
Balance as at 31 December 2011 Total comprehensive income Profit for the year Other comprehensive income Transactions with owners recorded directly in equity Transfer of loss for 2011 Balance as at 31 December 2012
-
-
(1 ,016)
1,016
-
86,100
248
(27,758)
1,194
59,784
Total comprehensive income Loss for the year Other comprehensive income
-
(248)
-
(7,788) -
(7,788) (248)
-
-
1,194
(1,194)
-
86,100
-
(26,564)
(7,788)
51,748
Transactions with owners recorded directly in equity Transfer of profit for 2012 Balance as at 31 December 2013
The financial statements on pages 7 - 53 have been authorized for issue by the Supervisory Board and the Management board on 24 February 2014 and signed on their behalf by:
Gianfranco Bisagni Chairman of the Supervisory Board
Günter Friedl Member of the Management Board
The accompanying notes on pages 12 – 53 are an integral part of these financial statements.
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11
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS 1
BACKGROUND
These financial statements include the financial information of AS “UniCredit Finance” (prevously AS “UniCredit Bank”) and its branches in Lithuania and Estonia (together referred to as the “Bank”, “UniCredit Bank”). AS “UniCredit Bank” is a bank registered and licensed in the Republic of Latvia. The address of the Bank’s registered office is Elizabetes iela 63, Riga, LV-1050, Latvia. The Bank received its licence from the Bank of Latvia on 19 December 1996. The principal activities of the Bank are deposit taking and customer accounts maintenance, lending, issuing guarantees, cash and settlement operations and operations with securities and foreign exchange. The activities of the Bank are regulated by the Bank of Latvia and the Financial and Capital Market Commission (“FCMC”). The Bank has 2 branches which enables it to conduct business throughout the Baltic states. In the beginning of 2013 the Bank announced centralisation of its activities from Lithuania and Estonia to Latvia, later in the year announcement of discontinuity of banking operations was made. Liquidation of Lithuania and Estonia branches was started on 31.08.2013. Financial and Capital Market Commission allowed the Bank to annul the licence for performance of credit institution operations from 1 January 2014. Average number of people employed by the Bank during the year was 114 (2012: 184). Shareholders The Bank is wholly-owned by UniCredit Bank Austria AG (the “Shareholder Bank”). A significant portion of the Bank’s funding is provided by the Shareholder Bank. As a result the Bank is economically dependent upon the Shareholder Bank. In addition, the activities of the Bank are closely linked with the requirements of the Shareholder Bank and determination of the pricing of the Bank’s services to the Shareholder Bank is undertaken at arm’s length principle. Related party transactions are detailed in Note 33. 2
BASIS OF PREPARATION
Statement of compliance The financial statements of the Bank have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union, and regulations of the Financial and Capital Market Commission of the Republic of Latvia in force as at the reporting date. The strategy of UniCredit Group in Baltics, de-licensing of AS “UniCredit Bank” as well as decision of UniCredit Bank Austria AG, the merge of Bank” into SIA “UniCredit Leasing” is planned during 2014. Taking into account aforementioned, the management assess appropriate to apply IFRS as basis in preparation of these financial statements except for assets that are accounted at lower of their carrying amount and net realizable value. The financial statements were authorised for issue by the Management board on 24 February 2014. The shareholders have the power to reject the financial statements prepared and presented by the Management Board, and the right to request that new financial statements are prepared. Basis of measurement The financial statements have been prepared on the historical cost basis except for the following items: financial assets and liabilities carried at fair value through profit or loss and available for sale financial assets are measured at fair value except those whose fair value cannot be reliably estimated. Functional and Presentation Currency The financial statements are presented in the Bank’s functional currency, in thousands of Lats (LVL 000’s), unless otherwise stated. Functional currency for branches in Lithuania and Estonia are Litas and Euro, respectively.
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12
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS 3
SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies have been applied in the preparation of the financial statements. The accounting policies have been consistently applied. Foreign currency transactions Transactions in foreign currencies are translated into the respective functional currency of the operation at the exchange rate set by Central banks at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated into the functional currency at the spot exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated into the functional currency at the spot exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognised in profit or loss, except for differences arising on the retranslation of available-for-sale financial (debt) instruments, which are recognised in other comprehensive income. Non-monetary items that measured in terms of historical cost in foreign currency are translated using the exchange rate at the date of transaction. The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to the presentation currency at the exchange rate at the reporting date. The income and expenses of foreign operations are translated to presentation currency at exchange rates that approximate those on the date of the transactions. Differences arising on translation to presentation currency are recognised in other comprehensive income. Cash and cash equivalents Cash and cash equivalents include notes and coins on hand, unrestricted balances held with central banks and highly liquid financial assets with original maturities of less than three months, which are subject to insignificant risk of changes in their fair value, and are used by the Bank in the management of its short-term liabilities and commitments. Financial instruments (a) Classification Financial instruments at fair value through profit or loss are financial assets or liabilities that are acquired or incurred principally for the purpose of selling or repurchasing in the near term; or that are part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking; or that are a derivative (except for a derivative that is a designated and effective hedging instrument); or that are upon initial recognition, designated by the entity as at fair value through the profit or loss. Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Bank has the positive intention and ability to hold to maturity, and which are not designated at fair value through profit or loss, or available for sale. In addition these are assets that do not meet the definition of loans and receivables. Available-for-sale assets are those non-derivative financial assets that are designated as available-for-sale or are not classified as loans and receivables, held-to-maturity investments or financial instruments at fair value through profit or loss. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Financial liabilities carried at amortised cost represent financial liabilities of the Bank other than financial liabilities designated at fair value through profit or loss. This category includes term balances due to credit institutions, customer deposits, and other financial liabilities corresponding to such a classification. An impairment loss allowance for credit losses is established. For the policy see Note 13 – Impairment losses and Note 19 – Loans and receivables due from non-banking customers. In general loan is written off in case when all necessary steps for repayment of the loan were done, collateral was realized and the customer is non-performing.
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13
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS Loans under Risk Participation Agreements (“RPA”) are written off upon fulfillment of RPA conditions and receiving reimbursement from UniCredit Bank Austria AG. The funds cover the principal and accrued interest of each individual loan, subject to RPA. (b) Recognition The Bank initially recognises loans and receivables, deposits, and subordinated liabilities on the date at which they are originated. All other financial assets and liabilities are recognised in the statement of financial position on the trade date when the Bank becomes a party to the contractual provisions of the instrument. (c) Measurement A financial asset or liability is initially measured at its fair value plus, in the case of a financial asset or liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or liability. Subsequent to initial recognition, financial assets, including derivatives that are assets, are measured at their fair values, without any deduction for transaction costs that may be incurred on sale or other disposal, except for: •
held-to-maturity investments and loans and receivables that are measured at amortised cost using the effective interest method; and
•
investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured which are measured at cost.
All financial liabilities, other than those designated at fair value through profit or loss and financial liabilities that arise when a transfer of a financial asset carried at fair value does not qualify for derecognition, are measured at amortised cost. Amortised cost is calculated using the effective interest method. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortised based on the effective interest rate of the instrument. For the purposes of these financial statements, loans and receivables include regular loans, credit card balances, and are accounted for at amortised cost using the effective interest method. Certain expenses, such as legal fees or sales commissions for employees acting as agents or other expenses that are incurred in securing a loan are treated as part of the cost of the transaction. (d) Fair value measurement principles Fair value is the amount for which an asset could be exchanged, or a liability transferred to market participant, between knowledgeable, willing parties in an arm’s length transaction on the measurement date. When available, the Bank measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm’s length basis. If a market for a financial instrument is not active, the Bank establishes fair value using a valuation technique. Valuation techniques include using recent arm’s length transactions between knowledgeable, willing parties (if available), reference to the current fair value of other instruments that are substantially the same, discounted cash flow analyses and option pricing models. The chosen valuation technique makes maximum use of observable market inputs, relies as little as possible on estimates specific to the Bank, incorporates all factors that market participants would consider in setting a price, and is consistent with accepted economic methodologies for pricing financial instruments. Inputs to valuation techniques reasonably represent market expectations and measures of the risk-return factors inherent in the financial instrument. The Bank calibrates valuation techniques and tests them for validity using prices from observable current market transactions in the same instrument or based on other available observable market data. The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e., the fair value of the consideration given or received, unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e., without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets. When transaction price provides the best evidence of fair value at initial recognition, the financial instrument is initially measured at the transaction price and any difference between this price and the value initially obtained from a valuation model is subsequently recognised in statement of comprehensive income (available-for-sale only) depending on the individual facts and circumstances of the transaction but not later than when the valuation is supported wholly by observable market data or the transaction is closed out. _________________________________________________________________________________________________
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AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS Assets and long positions are measured at a bid price; liabilities and short positions are measured at an asking price. Where the Bank has positions with offsetting risks, mid-market prices are used to measure the offsetting risk positions and a bid or asking price adjustment is applied only to the net open position as appropriate. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Bank and counterparty where appropriate. Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties, to the extent that the Bank believes a third-party market participant would take them into account in pricing a transaction. For further analysis of basis for fair value see Note 21 – Classification and fair value of assets and liabilities. (e) Gains and losses on subsequent measurement A gain or loss arising from a change in the fair value of a financial asset or liability measured at fair value is recognised as follows: •
a gain or loss on a financial instrument classified as at fair value through profit or loss is recognised in the income statement;
a gain or loss on an available-for-sale financial asset is recognised in other comprehensive income (except for impairment losses and foreign exchange gains and losses on debt financial instruments) until the asset is derecognised, at which time the cumulative gain or loss previously recognised in equity is recognised in the income statement. Interest in relation to an available-for-sale financial asset is recognised as earned in the income statement calculated using the effective interest method. For financial assets and liabilities carried at amortised cost, a gain or loss is recognised in the income statement when the financial asset or liability is derecognised or impaired, and through the amortization process. •
(f) Derecognition A financial asset is derecognised when the contractual rights to the cash flows from the financial asset expire or when the Bank transfers substantially all of the risks and rewards of ownership of the financial asset. Any rights or obligations created or retained in the transfer are recognised separately as assets or liabilities. A financial liability is derecognised when it is extinguished. If the Bank neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Bank continues to recognise the financial asset. The Bank also derecognises certain assets when it writes off balances pertaining to the assets deemed to be uncollectible. (g) Repurchase and reverse repurchase agreements Securities sold under sale and repurchase (“repo”) agreements are accounted for as secured financing transactions, with the securities retained in the statement of financial position and the counterparty liability included in amounts payable under repo transactions. The difference between the sale and repurchase price represents interest expense and is recognised in the income statement over the term of the repo agreement using the effective interest rate method. Securities purchased under agreements to resell (“reverse repo”) are recorded as amounts receivable under reverse repo transactions. The differences between the purchase and resale prices are treated as interest income and accrued over the term of the reverse repo agreement using the effective interest method. If assets purchased under agreement to resell are sold to third parties, the obligation to return securities is recorded as a trading liability and measured at fair value. (h) Derivative financial instruments Derivative financial instruments include swap, forward, futures and options in interest rate, foreign exchange, precious metals and stock markets, and any combinations of these instruments. Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative. Changes in the fair value of derivatives are recognised immediately through income statement. Although the Bank trades in derivative instruments for risk hedging purposes, the Bank does not adopt hedge accounting.
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15
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS (i) Offsetting Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. Property and equipment (a) Owned assets Items of property and equipment are stated at cost less accumulated depreciation and impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. Where an item of property and equipment comprises major components having different useful lives, they are accounted for as separate items of property and equipment. (b) Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of the individual assets. Depreciation commences on the date of acquisition or, in respect of internally constructed assets, from the time an asset is completed and ready for use. Depreciation methods, residual values and useful lives of assets are reviewed annually. The estimated useful lives are as follows: 1 to 5 years Equipment 5 to 10 years Fixtures and fittings Vehicles Computer software
5 years 3 to 5 years
(c) Repossessed assets As part of the normal course of business the Bank occasionally takes possession of property that originally was pledged as security for a loan. When the Bank acquires (i.e. gains a full title to) a property in this way, the property’s classification follows the nature of its intended use by the Bank. When the Bank is uncertain of its intentions with respect to property that it has repossessed, those properties are classified as investment property. Other types of collateral are classified as other assets. (d) Intangible assets Intangible assets, which are acquired by the Bank, are stated at cost less accumulated amortisation and impairment losses. Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets. Amortisation methods, residual values and useful lives of intangible assets are reviewed annually. Impairment (a) Financial assets At each reporting date the Bank assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. Financial assets are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset, and that the loss event has an impact on the future cash flows of the asset that can be estimated reliably. Objective evidence that financial assets (including equity securities) are impaired can include default or delinquency by a borrower, restructuring of a loan or advance by the Bank on terms that the Bank would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. The Bank considers evidence of impairment for loans and receivables and held-to-maturity investment securities at both a specific asset and collective level. All individually significant loans and receivables and held-to-maturity investment securities are assessed for specific impairment. All individually significant loans and receivables and _________________________________________________________________________________________________
16
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS held-to-maturity investment securities found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Loans and receivables and held-to-maturity investment securities that are not individually significant are collectively assessed for impairment by grouping together loans and receivables and held-to-maturity investment securities with similar risk characteristics. In assessing collective impairment the Bank uses statistical modelling of historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical modelling. Default rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure that they remain appropriate. Impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account against loans and receivables. Interest on the impaired asset continues to be recognised through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. Impairment losses on available-for-sale investment securities are recognised by transferring the cumulative loss that has been recognised in other comprehensive income to profit or loss. The cumulative loss that is removed from equity and recognised in profit or loss is the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss previously recognised in statement of comprehensive income. Changes in impairment provisions attributable to time value are reflected as a component of interest income. If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed, with the amount of the reversal recognised in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised in other comprehensive income. (b) Non-financial assets The carrying amounts of the Bank’s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses recognised in prior periods for assets other than goodwill are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Provisions A provision is recognised in the statement of financial position when the Bank has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits, which can be reliably estimated, will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.
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17
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS Credit related commitments In the normal course of business, the Bank enters into credit related commitments, comprising undrawn loan commitments, letters of credit and guarantees, and provides other forms of credit insurance. Financial guarantees are contracts that require the Bank to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. A financial guarantee liability is recognised initially at fair value net of associated transaction costs, and is measured subsequently at the higher of the amount initially recognised less cumulative amortisation or the amount of provision for losses under the guarantee. Provisions for losses under financial guarantees and other credit related commitments are recognised when losses are considered probable and can be measured reliably. Dividends The ability of the Bank to declare and pay dividends is subject to the rules and regulations of the Latvian legislation. Dividends in relation to ordinary shares are reflected as an appropriation of retained earnings in the period when they are declared. Taxation Income tax expense comprises current and deferred tax. Income tax expense is recognised in the income statement except to the extent that it relates to items recognised directly in equity or in other comprehensive income. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of goodwill, the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries to the extent that they probably will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Income and expense recognition (a) Interest income and expense With the exception of financial assets held for trading and other financial instruments at fair value through profit or loss, interest income and expense are recognised in the income statement using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or financial liability and of allocating the interest income or interest expense over the relevant period. Interest income on financial assets held for trading and on other financial instruments at fair value through profit or loss comprises coupon interest only. Accrued discounts and premiums on financial instruments at fair value through profit or loss are recognised in gains less losses from financial instruments at fair value through profit or loss, respectively. (b) Fee and commission income and expense Loan origination fees and other fees that are considered to be integral to the overall profitability of a loan, together with the related direct costs, are deferred and amortised to the interest income over the estimated life of the financial instrument using the effective interest rate method. Other fees, commissions and other income and expense items are recognised when the corresponding service has been performed. Risk participation agreement fees are calculated for the life period of the guaranteed loans, based on the individual loan evaluation, and recognised in the income statement as impairment allowance.
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18
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS (c) Net gain/loss on financial instrument at fair value through profit or loss Net gain/loss on financial instrument at fair value through profit or loss comprises gains less losses related to trading assets and liabilities and derivatives held for risk management purposes which do not qualify for hedge accounting, and includes realised and unrealised fair value changes, dividends, foreign exchange differences. (d) Dividends Dividend income is recognised in the income statement on the date that the dividend is declared. Employee benefits (a) Termination benefits Termination benefits are recognised as an expense when the Bank is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognised as an expense if the Bank has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. If benefits are payable more than 12 months after the reporting period, then they are discounted to their present value. (b) Short-term employee benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service provider. A liability is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Bank has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably. The Bank pays fixed security contributions to the Social Funds on behalf of its employees during the employment period in accordance with legal requirements and will have no obligations to pay further contributions relating to employee services in respect to pension of retired employees. Standards and Interpretations effective in the current period The following standards, amendments to the existing standards and interpretations issued by the International Accounting Standards Board (IASB) and adopted by the EU are effective for the current period: • IFRS 13 “Fair Value Measurement”, adopted by the EU on 11 December 2012 (effective for annual periods beginning on or after 1 January 2013), • Amendments to IFRS 1 “First-time Adoption of IFRS” – Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters, adopted by the EU on 11 December 2012 (effective for annual periods beginning on or after 1 January 2013), • Amendments to IFRS 1 “First-time Adoption of IFRS” – Government Loans, adopted by the EU on 4 March 2013 (effective for annual periods beginning on or after 1 January 2013), • Amendments to IFRS 7 “Financial Instruments: Disclosures” - Offsetting Financial Assets and Financial Liabilities, adopted by the EU on 13 December 2012 (effective for annual periods beginning on or after 1 January 2013), • Amendments to IAS 1 “Presentation of financial statements” – Presentation of Items of Other Comprehensive Income, adopted by the EU on 5 June 2012 (effective for annual periods beginning on or after 1 July 2012), • Amendments to IAS 12 “Income Taxes” – Deferred Tax: Recovery of Underlying Assets, adopted by the EU on 11 December 2012 (effective for annual periods beginning on or after 1 January 2013), • Amendments to IAS 19 “Employee Benefits” – Improvements to the Accounting for Post-employment Benefits, adopted by the EU on 5 June 2012 (effective for annual periods beginning on or after 1 January 2013), • Amendments to various standards “Improvements to IFRSs (cycle 2009-2011)” resulting from the annual improvement project of IFRS (IFRS 1, IAS 1, IAS 16, IAS 32, IAS 34) primarily with a view to removing inconsistencies and clarifying wording, adopted by the EU on 27 March 2013 (amendments are to be applied for annual periods beginning on or after 1 January 2013), • IFRIC 20 “Stripping Costs in the Production Phase of a Surface Mine”, adopted by the EU on 11 December 2012 (effective for annual periods beginning on or after 1 January 2013). _________________________________________________________________________________________________
19
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS The adoption of these amendments to the existing standards has not led to any changes in the Bank’s accounting policies. Standards and Interpretations issued by IASB and adopted by the EU but not yet effective At the date of authorisation of these financial statements the following standards, amendments to the existing standards and interpretations issued by IASB and adopted by the EU were in issue but not yet effective: • IFRS 10 “Consolidated Financial Statements”, adopted by the EU on 11 December 2012 (effective for annual periods beginning on or after 1 January 2014), • IFRS 11 “Joint Arrangements”, adopted by the EU on 11 December 2012 (effective for annual periods beginning on or after 1 January 2014), • IFRS 12 “Disclosures of Interests in Other Entities”, adopted by the EU on 11 December 2012 (effective for annual periods beginning on or after 1 January 2014), • IAS 27 (revised in 2011) “Separate Financial Statements”, adopted by the EU on 11 December 2012 (effective for annual periods beginning on or after 1 January 2014), • IAS 28 (revised in 2011) “Investments in Associates and Joint Ventures”, adopted by the EU on 11 December 2012 (effective for annual periods beginning on or after 1 January 2014), • Amendments to IFRS 10 “Consolidated Financial Statements”, IFRS 11 “Joint Arrangements” and IFRS 12 “Disclosures of Interests in Other Entities” – Transition Guidance, adopted by the EU on 4 April 2013 (effective for annual periods beginning on or after 1 January 2014), • Amendments to IFRS 10 “Consolidated Financial Statements”, IFRS 12 “Disclosures of Interests in Other Entities” and IAS 27 (revised in 2011) “Separate Financial Statements” – Investment Entities, adopted by the EU on 20 November 2013 (effective for annual periods beginning on or after 1 January 2014), • Amendments to IAS 32 “Financial instruments: presentation” – Offsetting Financial Assets and Financial Liabilities, adopted by the EU on 13 December 2012 (effective for annual periods beginning on or after 1 January 2014), • Amendments to IAS 36 “Impairment of assets” - Recoverable Amount Disclosures for Non-Financial Assets, adopted by the EU on 19 December 2013 (effective for annual periods beginning on or after 1 January 2014), • Amendments to IAS 39 “Financial Instruments: Recognition and Measurement” – Novation of Derivatives and Continuation of Hedge Accounting, adopted by the EU on 19 December 2013 (effective for annual periods beginning on or after 1 January 2014). The Bank anticipates that the adoption of these standards, amendments to the existing standards and interpretations will have no material impact on the financial statements of the Bank in the period of initial application. Standards and Interpretations issued by IASB but not yet adopted by the EU At present, IFRS as adopted by the EU do not significantly differ from regulations adopted by the International Accounting Standards Board (IASB) except from the following standards, amendments to the existing standards and interpretations, which were not endorsed for use in EU (the effective dates stated below is for IFRS in full): • • •
•
•
IFRS 9 “Financial Instruments” and subsequent amendments (effective date was not yet determined), Amendments to IAS 19 “Employee Benefits” - Defined Benefit Plans: Employee Contributions (effective for annual periods beginning on or after 1 July 2014), Amendments to various standards “Improvements to IFRSs (cycle 2010-2012)” resulting from the annual improvement project of IFRS (IFRS 2, IFRS 3, IFRS 8, IFRS 13, IAS 16, IAS 24 and IAS 38) primarily with a view to removing inconsistencies and clarifying wording (amendments are to be applied for annual periods beginning on or after 1 July 2014), Amendments to various standards “Improvements to IFRSs (cycle 2011-2013)” resulting from the annual improvement project of IFRS (IFRS 1, IFRS 3, IFRS 13 and IAS 40) primarily with a view to removing inconsistencies and clarifying wording (amendments are to be applied for annual periods beginning on or after 1 July 2014), IFRIC 21 “Levies” (effective for annual periods beginning on or after 1 January 2014).
The Bank anticipates that the adoption of these standards, amendments to the existing standards and interpretations will have no material impact on the financial statements of the Bank in the period of initial application.
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20
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS 4
RISK MANAGEMENT
The Bank has exposure to the following risks from financial instruments: • market risk • credit risk • liquidity risk • operational risk This note presents information about the Bank’s exposure to each of the above risks, the Bank’s objectives, policies and processes for measuring and managing risk. (a) Risk management policies and procedures Bank identifies, measures, monitors and manages all the risks of the Bank. In performing these tasks, the Bank works closely together with the risk control and risk management units of UniCredit Bank Austria AG (Bank Austria). In this context, the Bank supports Bank Austria ongoing projects which are aimed at establishing uniform group-wide risk controlling procedures. The Bank continued improving its risk management system, which resulted in effective detection of potential problem assets, timely credit decisions while maintaining the loans portfolio’s quality and the growth of revenue. The Bank’s risk management policies aim to identify, analyze and manage the risks faced by the Bank, to set appropriate risk limits and controls, and to continuously monitor risk levels and adherence to limits. Risk management policies and procedures are reviewed to reflect changes in market conditions, products and services offered and emerging best practice. The Management Board of the Bank has overall responsibility for the oversight of the risk management framework, overseeing the management of key risks and reviewing its risk management policies and procedures as well as approving significantly large exposures. The Management Board of the Bank is responsible for monitoring and implementation of risk mitigation measures and ensuring that the Bank operates within the established risk parameters. In performing these tasks, the Management Board is supported by specific committees (Credit Committees and Asset and Liability Management Committee) and independent risk management units. Risk Division structure is as follows: Credit Operations departments, Credit Risk Monitoring, Restructuring and Workout functions, Operational Risk and Risk Integration unit and Market Risk unit. The risk control function of the Bank is separated from the Bank’s business structures. In order to facilitate efficient decision-making, the Bank has established a hierarchy of credit committees depending on the type and amount of the exposure. Until end of 2013 the Head of Risk Division together with the Heads of Risk Division units in Estonia, Latvia and Lithuania were responsible for the overall risk management and compliance functions, ensuring the implementation of common principles and methods for identifying, measuring, and managing financial and non-financial risks. Heads of Risk Division units reported directly to Head of Risk Division, whereas Head of Risk Division reports to the Management Board of the Bank. After the closure of business activities of the Branches in Estonia and Lithuania a respective reorganization within Risk Division was done. As a result of this reorganization the Head of Risk Division in Latvia being fully responsible for the overall risk management and reports to Management Board. After de-licensing of the Bank initiated reorganization measures within Risk Division continued. Both external and internal risk factors are identified and managed throughout the Bank’s organizational structure. Particular attention is paid to developing risk map that is used to identify the full range of risk factors and serves as a basis for determining the level of assurance over the current risk mitigation procedures. Below mentioned risks were significant for the reporting year. According to internal evaluation of risk profile taking into consideration the project on revoke of banking license reputational and strategic risks were assessed as significant. After reorganization market risk is eliminated, liquidity risk is reduced in importance and therefore following risks are accepted as significant: credit risk and operational risk.
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21
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS (b) Market risks Market risk is the risk of loss arising from adverse movements in the price of financial instrument. Depending on the nature of the instrument an open position may be subject to one or more dimensions of market risk: interest rate risk, currency risk, commodity or equity risks. Overall authority for market risk is vested in the Asset and Liability Committee (ALCO), chaired by the Chief Financial Officer (further “CFO”) of the Bank. The approach to Market risk management entails the employment of all the available risk metrics both to Trading and to Banking Book regime activities. The market risk strategy of Bank is embedded into the global market risk strategy of the UniCredit Group (UCG). Based on this, the Market Risk Management Framework (MRMF) defined on UCG level and BA Sub-Holding level is applied in the Bank as far as applicable according to the business case of the Bank, the corresponding steering of the market risk and country local regulations. In this respect the ALCO defines the Market Risk Appetite witch entails the definition of the metrics employed to set the amount of risk the Bank is willing to take. These boundaries represent the ultimate risk taking limits that the Bank should not exceed. Trigger levels are introduced to set an early warning system to prevent the overtaking of the limits. In addition, the Bank uses a wide range of stress tests to model the financial impact of a variety of market scenarios. Stress tests provide an indication of the potential size of losses that could arise in extreme conditions. The stress tests carried out by the Bank include separate risk factor stress testing, where stress movements are applied to single risk factor, and market wide stress testing, where stress conditions are applied to combination of all risk factors. Capital adequacy and the use of regulatory capital are monitored by the Bank’s management on ongoing basis, employing techniques based on the guidelines developed by the Basel Committee and the European Community directives, as implemented by the Financial and Capital Market Commission. The required information is filed with the Financial and Capital Market Commission on a monthly basis. The closure of the business activities of Branches in Estonia and Lithuania had no significant impact on the Market Risk function and the bank`s existing Committees e.g. ALCO, strategy on Market Risk and it’s measurement were kept in place. Interest rate risk Interest rate risk (IRR) is the exposure of a bank’s financial condition to adverse movements in interest rates. Changes in interest rates affect a bank’s earnings by changing its net interest income and the level of other interest sensitive income and operating expenses. Changes in interest rates also affect the underlying value of the bank’s assets, liabilities and off-balance sheet instruments because the economic value of future cash flows (and in some cases, the cash flows themselves) change when interest rates change. With a view to capturing interest rate risk appropriately, interest rate risk breaks down into four main types: • Repricing risk: it results from timing differences in the maturity (for fixed rate) and repricing (for floating rate) of assets and liabilities. Such repricing mismatches can expose the bank's income and underlying economic value to unanticipated fluctuations as interest rates vary. • Yield curve risk: it arises from changes in shapes and slopes in the yield curve. • Basis risk: arises from imperfect correlation in the adjustment of the rates earned and paid on different instruments with otherwise similar repricing characteristics. • Option risk: arises from implicit and explicit options in financial instruments (e.g., early redemption rights in the case of loans, early repayment for deposits, etc.). IRR positions are monitored regularly according to the Financial and Capital Market Commission (FCMC) rules and Bank’s internal limits.
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22
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS Interest rate risk directly affects the value of Bank’s bond portfolio. As bond interest rates rise, bond prices fall and vice versa. Sensitivity analysis of the bond portfolio based on a simplified scenario of a 5% increase/decrease in prices for positions existing as at 31 December 2013 and 2012 are as follows:
’000 LVL
2013
2012
Net income
Equity
Net income
Equity
5% increase in bond prices
-
-
-
1,556
5% decrease in bond prices
-
-
-
(1,556)
For detailed information on the Bank’s exposure to interest rate risk and bond portfolio value at year-end refer to Note 36 – Interest rate repricing analysis, as well Note 18 – Held to maturity investments and Note 22 – Available for sale financial assets. Currency risk Currency risk is defined as a risk arising from the differences in the currency structure of the Bank’s assets and liabilities. Changes in currency exchange rates cause changes in the value of assets and liabilities as well as the amount of revenue and expenses calculated in national currency. Bank holds the minimum foreign currency positions necessary for rendering services to the customers. All foreign currency open positions are monitored daily according to the FCMC rules and Bank’s internal limits. Sensitivity by currency is a regular stress testing that Bank performs additionally to the daily limit monitoring. 20 percent depreciation/appreciation of the national currency LVL against the following main currencies as at 31 December 2013 and 2012 would have increased (decreased) net profit and equity by the amount shown below: ’000 LVL
2013 USD
2012 EUR
USD
EUR
20% appreciation in LVL currency rate against
3
403
31
477
20% depreciation in LVL currency rate against
(3)
(403)
(31)
(477)
It is worth to mention that after joining the European Union in 2004, the LVL was pegged to the EUR at the central parity rate of 0.702804 LVL for one EUR with an allowed fluctuation band of +/- 1%. The passive interventions of the Central Bank of Latvia ensure that exchange rate does not shift more than 1% above or below this exchange rate, i.e., does not exceed 0.6958 and 0.7098 LVL/EUR, respectively. For detailed information on the Bank’s exposure to currency risk at year-end refer to Note 34 – Currency analysis. Euro implementation The Bank successfully completed the project on EURO conversion and implemented all local requirements including all required changes for Credit Register in due time.
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23
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS (c) Credit risk Credit risk represents the risk that an unexpected change of the credit quality of counterparty might generate a change in the value of the credit exposure towards it. This change in the credit exposure value might be due to: • The default of the counterparty, that is not able to respect the contractual obligations; • The reduction of the credit quality of the counterparty. Credit default risk is considered to occur with regard to a particular obligor when either or both of the two following events take place: • The bank considers that the obligor is unlikely to pay its credit obligations to the banking group in full, without recourse by the bank to actions such as realising security (if held); • The obligor is past due more than 90 days on any material credit obligation to the banking group. The Bank has developed policies and procedures for the management of credit exposures (both for on-balance sheet and off-balance sheet exposures), including guidelines to limit portfolio concentration and the establishment of Credit approval authorities, which actively monitors the Bank’s credit risk. The Bank’s credit policy is regularly reviewed and approved by the Management Board. The Bank’s credit policy establishes: • Procedures for review and approval of loan/credit applications; • Methodology for the credit assessment and management of borrowers in different segments and in different risk classes; • Methodology for the assessment of counterparties, appraisal, audit and insurance companies; • Methodology for the evaluation of collateral; • Credit documentation requirements; • Procedures for the ongoing monitoring of loans and other credit exposures. Corporate credit applications are originated by the relevant client managers and are then passed on to Credit Operations, which is responsible for the Bank’s corporate loan portfolio. Risk assessment reports produced by the Credit Analysts are based on a structured analysis focusing on the customers’ business and financial performance. The credit application and the risk assessment report, as part of the credit application, are then independently reviewed by the credit approval authority. The credit approval authority also checks that credit policy requirements have been met. Individual transactions are also reviewed by the Bank’s product specialists or Legal department depending on the specific risks and pending final approval of the Credit approval authorities. Apart from the standard credit and market risk analysis, the Credit Operations monitors financial and non-financial risks by holding regular meetings within the operational units in order to obtain expert judgments in their areas of expertise. Retail credit applications are reviewed by the Bank’s Sales Monitoring and Restructuring unit through the use of scoring models and application data verification procedures developed together with Credit Operations. To assess the credit risk of the customers, the Bank has several scoring modules in place. For scoring of corporate customers, the Bank uses UniCredit Bank Austria AG scale, according to which customers are classified in one out of 10 risk classes, where 1 is the lowest risk, while 10 indicates the highest risk of failure. Separate scoring cards are used for private banking, real estate and trade finance customers. The Bank continuously monitors the performance of individual credit exposures and regularly reassesses the creditworthiness of its customers. The review is based on the customer’s most recent financial statements and other information submitted by the borrower, or otherwise obtained by the Bank. The current market value of collateral is regularly assessed by either independent appraisal companies or the Bank’s specialists. Specialized personnel are dealing with the Bank’s non-performing loans. To increase the effectiveness of problem loan management, the Bank’s main efforts are concentrated on seeking optimal individual strategies for work with problem real estate, private banking and corporate borrowers, including restructuring, amicable agreements, compensations and assignments, and sale of debt. As a result of these efforts, the main problem loans were brought under control and significant part of non-performing loans were worked out. Apart from individual customer analysis, the whole credit portfolio is assessed by Head of Risk Division with regard to asset quality and credit concentration. _________________________________________________________________________________________________
24
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS
The Bank’s maximum exposure to on-balance sheet credit risk is generally reflected in the carrying amounts of financial assets on the balance sheet. The impact of possible netting of assets and liabilities to reduce potential credit exposure is not significant. For the analysis of credit risk with respect to loans and receivables of customers refer to Note 19 – Loans and receivables due from non-banking customers. (d) Liquidity risk Liquidity risk is defined as the risk that the Bank may find itself unable to fulfill its payment obligations (by cash or delivery) whether expected or unexpected without jeopardizing its day-to day operations or its financial condition and may arise as a result of various internal or external factors. There are three components of Liquidity Risk: •
•
•
Liquidity Mismatch Risk: the risk of a mismatch between either the amounts or the timing of cash inflows and outflows. The liquidity mismatch risk can also be referred to as structural liquidity risk. The liquidity mismatch risk determines the day-to-day funding requirements. Liquidity Contingency Risk: the risk that future events may require a materially larger amount of liquidity than the bank currently requires. This might be due to the loss of liabilities, requirements to fund new assets, difficulty in selling liquid assets or difficulty obtaining much needed new liabilities in the case of a liquidity crisis. Market Liquidity Risk: the potential that an institution cannot easily unwind or offset specific exposures (such as investments held as liquidity reserves) without incurring a loss because of inadequate market depth or market disruptions.
The main goal of the overall liquidity management is to keep the liquidity exposure at such a level that the Bank is able to honor its payment obligations not only on an on-going basis, but also during a crisis without jeopardizing its brand’s name. The strategy to implement such a purpose is accomplished by the following actions: - Short-term liquidity risk management (operative maturity ladder), which considers the Bank’s liquidity position from 1 day up 1 year; - Structural liquidity risk management (structural position), which considers the Bank’s liquidity position over one year; - Short term liquidity stress testing; A system of Liquidity Early Warning Indicators is also in place in order to continuously monitor situations of stress, which may, among others, be originated by market, sector or name specific events. The Bank is measuring and monitoring liquidity risk using the internal Group wide Liquidity risk Metrics system defining: - Liquidity Risk metrics - time buckets, gaps, thresholds and waivers, etc; - Liquidity planning instruments - Contingency Liquidity Policy, Liquidity policy statement, Funding Plan. The internal limits and corresponding internal monitoring procedures are strictly defined and periodically reviewed and updated. The Bank seeks to actively support a stable funding base comprising long-term and short-term loans from other banks, core corporate and retail customer deposits, accompanied by portfolios of highly liquid assets, in order to be able to respond quickly and smoothly to unforeseen liquidity requirements. The ALM/Treasury department receives information from business units regarding the liquidity profile of financial assets and liabilities and details of other projected cash flows arising from projected future business. The ALM/Treasury department then provides for an adequate portfolio of short-term liquid assets to be maintained, largely made up of short-term liquid trading securities, loans to banks and other interbank facilities, to ensure that sufficient liquidity is maintained within the Bank as a whole. Due to the reorganization with the target to revoke the license of the Bank, ALM/ Treasury Department decreased continuously business, however sufficient liquidity is maintained for funding of business at any time. _________________________________________________________________________________________________
25
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS
The daily liquidity position is monitored and regular liquidity stress testing under a variety of scenarios covering both normal and more severe market conditions is performed by the Market Risk unit. Overview of the Bank’s liquidity risk and liquidity stress tests results are presented to ALCO on a monthly basis, that is the main decision making body for the Bank’s liquidity management. In accordance with the requirements of the FCMC, the Bank monitors mandatory liquidity ratios on a daily basis. As at 31 December 2013 and 31 December 2012 the Bank was in compliance with regulatory liquidity ratios. For maturity analysis of the Bank’s balance and off-balance sheet at year-end refer to Note 35 - Maturity analysis. (e) Operational risk The Bank defines as operational the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The definition of Operational Risk includes legal risk, but excludes strategic and reputational risk. Legal risk includes, but is not limited to, exposure to fines, penalties, or punitive damages resulting from supervisory actions, as well as private settlements. Occurrence of an operational risk results in an operational event. Operational events are those resulting from inadequate or failed internal processes, personnel and systems or from systemic and other external events: internal or external fraud, employment practices and workplace safety, clients’ claims, products distribution, fines and penalties due to regulation breaches, damage to Bank’s physical assets, business disruption and system failures, process management. The aim of operational risk management is to assure the effectiveness of control over operational risk, the reduction of operational risk losses and introduction of risk mitigation measures. The Bank’s operational risk management framework is a set of policies and procedures for controlling, measuring and mitigating the operational risk of the Bank. The operational risk policies are common principles defining the roles of the Bank’s bodies, the operational risk management function as well as the relationship with other functions in the Bank. Operational risk policies are developed in line with UniCredit Group and UniCredit Bank Austria AG requirements, and National Regulations, and approved by both the Management Board and the Supervisory Board. The methodology for data classification and completeness, scenario analysis, risk indicators and capital at risk measurement is set by UniCredit Group operational risk management function and applies to the Bank. Operational Risk and Risk Integration unit is responsible for a correct implementation of the Group framework elements and regulatory requirements, and provides regular reporting to the Management Board and competent bodies of UniCredit Group and UniCredit Bank Austria AG. Operational risk management and its compliance with procedures are supervised by the Head of Risk Division and in addition operational risk management office of UniCredit Bank Austria AG. The compliance with Bank standards is supported by a program of periodic reviews undertaken by Internal Audit. The Bank has developed a Business Continuity Plan and Disaster Recovery Plan for uninterrupted operation to overcome emergency cases and resume normal operation of the Bank. The plans are updated annually by Chief Security Officer. Substantial operational risks are covered with relevant insurance. 5
CAPITAL MANAGEMENT
The Bank’s objectives when managing capital, which is a broader concept than the “equity” on the face of statement of financial position, are: • • •
to comply with the capital regulatory requirements to safeguard the Bank’s ability to continue as a going concern so that it can continue to provide return to shareholders to maintain a strong capital base to support the development of its business.
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26
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS The Credit Institution Law and regulations developed by the Financial and Capital Market Commission for application of the norms of this law, require Latvian banks to maintain a capital adequacy ratio of 8%, i.e., Bank’s capital ratio against the risk weighted assets and memorandum items and the sum of notional risk weighted assets and memorandum items. The sum of notional risk weighted assets and memorandum items is determined as the sum of capital requirements of credit market and other risks, multiplied by 12.5. The guidelines of the Financial and Capital Market Commission for calculation of capital adequacy basically agree to the recommendations under the Basel Capital Accord and amendments thereto. According to the Basel Capital Accord, the capital adequacy ratio should be at least 8% adjusted to 10% according to Financial and Capital Market Commission requirements. Capital adequacy refers to the sufficiency of the Bank’s capital resources to cover the credit risk, market risk and operational risk arising from the portfolio of assets of the Bank and the memorandum items’ exposures of the Bank. The Bank’s risk based capital adequacy ratio as at 31 December 2013 was 43.24% (2012: 13.17%). This is in full compliance the related Financial and Capital Market Commission’s requirements. The Financial and Capital Market Commission requirements are principally consistent with the Basel Committee guidelines and the European Union directives for the calculation of equity to be utilised in the capital adequacy ratio. Based on these requirements set by the Financial and Capital Market Commission, the Bank's equity to be utilised in the capital adequacy ratio as at 31 December 2013 has been calculated as follows below: Description Tier 1 Share capital Accumulatd (losses) (Loss) for the current period Intangible assets Revaluation reserve Total Tier 1
‘000 LVL 86,100 (26,564) (7,788) (62) 51,686
Tier 2 Subordinated capital (restricted to 50% of Tier 1) Total Tier 2
-
Total capital
51,686
Capital required
9,563
Capital adequacy ratio
43.24%
Based on these requirements set by the Financial and Capital Market Commission, the Bank's equity to be utilised in the capital adequacy ratio as at 31 December 2012 has been calculated as follows below: Description Tier 1 Share capital Accumulatd (losses) Profit for the current period Intangible assets Revaluation reserve Total Tier 1
‘000 LVL 86,100 (27,758) 1,194 (1,011) 58,525
Tier 2 Subordinated capital (restricted to 50% of Tier 1) Total Tier 2
10,407 10,407
Total capital
68,932
Capital required
41,863
Capital adequacy ratio
13.17%
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27
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS Capital adequacy and the use of regulatory capital are monitored by the Bank’s management, employing techniques based on the guidelines developed by the Basel Committee and the European Community directives, as implemented by the Financial and Capital Market Commission. The required information is filed with the Financial and Capital Market Commission on a monthly basis. The closure of the business activities of Branches in Estonia and Lithuania led to maintaining the bank’s Capital adequacy ratio on a confident level far above 10% and had no significant impact on the Capital Management function of the bank . 6
USE OF ESTIMATES AND JUDGEMENTS
The preparation of financial statements in conformity with IFRSs as adopted by the EU requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. 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 judgments 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 those 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. Key sources of estimation uncertainty (a) Allowances for credit losses Allowances for impairment apply to loans and receivables evaluated individually for impairment and are based upon management’s best estimate of the present value of the cash flows that are expected to be received. In estimating these cash flows, management makes judgements about a counterparty’s financial situation and the net realisable value of any underlying collateral. Each impaired asset is assessed on its merits, and the workout strategy and estimate of cash flows considered recoverable are independently approved by the Credit Risk function. Collectively assessed impairment allowance covers credit losses inherent in portfolio of loans with similar credit risk characteristics when there is objective evidence to suggest that they contain impaired loans, but individual impaired items cannot yet be identified. In assessing the need for collective loss allowances, management considers factors such as credit quality, portfolio size, concentration and economic factors. In order to estimate the required allowance, assumptions are made to define the way inherent losses are modeled and to determine the required input parameters, based on historical experience and current economic conditions. The accuracy of the allowance depends on the estimates of future cash flows for specific counterparty allowance and the model assumptions and parameters used in determining collective allowance. (b) Impairment of other financial instruments The determination of impairment indication is based on comparison of the financial instrument’s carrying value and fair value. Due to downturns in the financial and capital markets, the market price (if the market is inactive) is not always a reliable source for impairment indication. The Bank uses valuation models based on quoted market prices of similar products. For the purposes of impairment loss measurement, the Bank’s management makes estimates of any expected changes in future cash flows from a specific financial instrument based on analysis of financial position of the issuer of the financial instrument. (c) Deferred tax asset recognition A deferred tax asset is recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and available tax losses can be utilised. Determining fair values of financial instruments The determination of fair value for financial assets and liabilities for which there is no observable market price requires the use of valuation techniques that are described in Note 3 - Significant accounting policies, Financial instruments (d). For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgement depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument. _________________________________________________________________________________________________
28
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS The table below analysis financial instruments carried at fair value, by valuation method: ‘000 LVL 2013 Financial assets Available for sale assets Derivative financial instruments
Valuation techniques based on market observable inputs (Level 2)
Total
-
-
-
-
28,512 282 28,794
28,512 282 28,794
1,023 1,023
1,023 1,023
Financial liabilities Derivative financial instruments 2012 Financial assets Available for sale assets Derivative financial instruments Financial liabilities Derivative financial instruments
Level 1) Included in this category are financial assets and liabilities that are measured in whole by reference to published quotes in an active market. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis. Main asset classes included in this category are financial assets for which the fair value is obtained via pricing vendors or binding broker quotes and assets for which the fair value is determined by reference to indices. Level 2) Included in this category are financial assets and liabilities that are measured using a valuation technique based on assumptions that are supported by prices from observable current market transactions in the same instrument or based on available market data. Main asset classes included in this category are financial assets for which pricing is obtained via pricing services but where prices have not been determined in an active market, financial assets with fair values based on broker quotes, investments in hedge funds private equity funds with fair value obtained via fund managers and assets that are valued using own models whereby the majority of assumptions are market observable. Level 3) Valuation techniques using significant unobservable inputs. This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments.
7
SIGNIFICANT TRANSACTION
To follow the Bank’s Strategic plan on ‘De-licensing of AS UniCredit Bank with further merger with SIA UniCredit Leasing and comply with Latvian regulation, on 24 October 2013 the Bank concluded an agreement with AS Swedbank (Latvia), Swedbank AB (Lithuania) and Swedbank AS (Estonia) ensuring that remaining customer deposits, part of guarantees, letters of credit and selected loans are further managed by a licensed credit institution in all 3 countries. Financial and Capital Market Commission approved the transactions on 21 November 2013. The following bank balances were transferred to Swedbank group entities: Carrying amount ’000 LVL 28,889 528 9,731 6
Loans and receivables Deposits from non-banking customers Guarantees Other off-balacne sheet items
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29
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS
8
8INTEREST
INCOME
Interest on loans and receivables to non-banking customers Including interest income on impaired loans and receivables Interest on balances due from credit institutions Interest on held-to-maturity investments Interest on available-for-sale assets Other interest income Total interest income
9
2013 ’000 LVL 9,314 321 32 71 476 506 10,399
2012 ’000 LVL 16,859 2,940 84 151 417 1,004 18,515
INTEREST EXPENSE
Interest on balances due to credit institutions Interest on deposits from non-banking customers Interest on subordinated liabilities Other interest expense Total interest expense
2013 ’000 LVL (3,028) (401) (377) (381) (4,187)
2012 ’000 LVL (4,989) (2,136) (464) (1,049) (8,638)
2013 ’000 LVL 437 289 249 36 11 21 22
2012 ’000 LVL 842 561 619 105 35 63 17
1,065
2,242
2013 ’000 LVL (76) (18) (105) (22)
2012 ’000 LVL (42) (44) (241) (95)
(221)
(422)
10 FEE AND COMMISSION INCOME
Commissions on guarantees Commissions on letters of credit Commissions on money transfers Commissions on account maintenance Commissions on cash transactions Commissions on credit cards Other fee and commission income Total commission and fee income
11 FEE AND COMMISSION EXPENSE
Commissions on money transfers Commissions on cash transactions Commissions on loan granting Other fee and commission expense Total commission and fee expense
12 NET FOREIGN EXCHANGE INCOME
Profit from foreign currency transactions Gain/ (Loss) from revaluation of foreign currency positions Net result on foreign exchange
2013 ’000 LVL 90 745
2012 ’000 LVL 2,582 (1,080)
835
1,502
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30
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS
13 IMPAIRMENT LOSSES 2013 ’000 LVL Impairment losses Loans and receivables due from customers Guarantees Risk Participation Agreements Reversals of impairment losses Loans and receivables due from customers Guarantees Net impairment losses
2012 ’000 LVL
(12,058) (1,262) (236)
(5,872) (934) (963)
(13,556)
(7,769)
7,711 181 7,892
4,341 4,341
(5,664)
(3,428)
14 GENERAL ADMINISTRATIVE EXPENSES
Remuneration Depreciation and amortisation Computer and IT service expenses Social security contributions and other employee related costs Rent of premises Representation expenses and business relations Communication and post expenses Value-added tax Consulting services Security expenses Business trips Office materials Project expenses Other administrative expenses Total administrative expenses
2013 ’000 LVL (2,563) (1,232) (611) (839) (441) (69) (258) (183) (188) (46) (77) (33) (3,330) (305)
2012 ’000 LVL (3,591) (1,028) (708) (978) (481) (192) (362) (187) (332) (54) (82) (51) (386)
(10,175)
(8,432)
Project expenses are costs directly attributed to “De-licesning” process and include severance payments, consultancy and down payments in rentals related to restructuring process.
15 INCOME TAX EXPENSE 2013 ’000 LVL -
Corporate income charge tax for the year Deferred tax income/ (expense) Total corporate income tax expense
2012 ’000 LVL -
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31
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS The table below shows reconciliation between total tax expense and theoretical amount that would arise using basic tax rate, which was 15% in 2013 (15% in 2012):
Profit/ (loss) before taxation Expected tax calculation at tax rate 15% Net of non-deductible expense Change in unrecognised deferred tax asset Other Total income tax expense
2013 ’000 LVL (7,788) 1,168 (89) (1,065) (14) -
2012 ’000 LVL 1,194 (179) (85) 226 38 -
31.12.2013 ’000 LVL -
31.12.2012 ’000 LVL 5,138
55,272 55,272
15,700 20,838
16 CASH AND BALANCES WITH THE BANK OF LATVIA
Cash Balances due from Bank of Latvia - Minimum reserve deposit - Deposit Facility Total cash and balances with the Bank of Latvia The correspondent account with the Bank of Latvia is non-interest bearing.
In accordance with regulations set by the Financial and Capital Market Commission, the Bank’s cash and current account balance with the Central Bank of Latvia should be not less than the required reserves calculated on basis of the average monthly customer deposits. The Bank has complied with the aforementioned requirements as at 31 December 2013 and 2012.
17 DEMAND BALANCES AND TERM DEPOSITS DUE FROM CREDIT INSTITUTIONS
Nostro accounts and Demand deposits Due from credit institutions registered in Latvia Due from credit institutions registered in EU Due from credit institutions registered in OECD area (non-EU) Due from credit institutions registered in other countries Total demand balances Term deposits Due from credit institutions registered in Latvia Due from credit institutions registered in other EU countries Due from credit institutions registered in OECD area (non-EU) Total term deposits Total demand balances and term deposits due from credit institutions
31.12.2013 ’000 LVL
31.12.2012 ’000 LVL
1,813 1,831 3,644
83,794 3,981 124 87,899
74 74 3,718
2,002 822 2,824 90,723
Concentration of placements with credit institutions As at 31 December 2013 the Bank had balances with two credit institutions, rated by S&P A+ and A-, whose balances exceeded 10% of total placements with credit institutions (2012: three credit institutions, rated by S&P A, AA- and BBB). The gross value of these balances as of 31 December 2013 and 2012 were LVL 3,547 thousand and LVL 80,673 thousand, respectively.
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32
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS 18 HELD-TO-MATURITY INVESTMENTS
Government bonds (Latvia, S & P – BBB, Moody – Baa 3) Total held-to-maturity investments
31.12.2013 ’000 LVL -
31.12.2012 ’000 LVL 3,124 3,124
Remaining securities were sold in the line with reorganisation project. 19 LOANS AND RECEIVABLES DUE FROM NON-BANKING CUSTOMERS Division of the loans by type of customers 31.12.2013 ’000 LVL
31.12.2012 ’000 LVL
Commercial loans Loans to large corporates Loans to small and medium size companies Total commercial loans
24,313 74,408 98,721
166,790 267,933 434,723
Loans to individuals Consumer loans Credit cards Mortgage loans Other Total loans to individuals
511 9,150 6,851 16,512
689 59 12,746 8,913 22,407
115,233 (27,926) (606) 86,701
457,130 (25,321) (2,809) 429,000
Gross loans and receivables to non-banking customers Individual impairment allowance Collective impairment allowance Net loans and receivables to non-banking customers
The Latvian banking legislation requires that any credit exposure to a non-related entity or group of non-related entities may not exceed 25% of a credit institution’s equity for the definition of equity under the Latvian banking legislation. As at 31 December 2013 and 2012, the Bank was in compliance with the aforementioned requirement. Part of loan portfolio weretransfered to Swedbank group. See Note 7.
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33
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS Industry analysis of the loan portfolio
Municipal authorities Trade Manufacturing Electricity and gas supply Construction Finance Real estate Agriculture, forestry and timber Transport and storage Hotels and restaurants Health and social care Social and individual service Other Industries Loans to individuals Gross loans and receivables to non-banking customers Individual impairment allowance Collective impairment allowance Net loans and receivables to non-banking customers
31.12.2013 ’000 LVL 6,789 15,211 13,094 3,252 604 36,993 17,460 459 4,859 16,512 115,233 (27,926) (606) 86,701
31.12.2012 ’000 LVL 11,549 109,371 85,188 4,168 5,253 1,569 135,325 2,859 48,246 2,441 1,340 22,905 4,509 22,407 457,130 (25,321) (2,809) 429,000
Loan portfolio discloses only significant industry exposures, more than 1 million LVL, the rest are included in position ‘Other’.
Geographical analysis of the loan portfolio
Latvia Lithuania Estonia Other EU countries OECD countries (non EU) Other Gross loans and receivables to non-banking customers Individual impairment allowance Collective impairment allowance Net loans and receivables to non-banking customers
31.12.2013 ’000 LVL 52,808 46,900 13,690 1,121 714 115,233 (27,926) (606) 86,701
31.12.2012 ’000 LVL 144,640 181,953 125,883 2,051 771 1,832 457,130 (25,321) (2,809) 429,000
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34
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS Loan portfolio quality (a) Ageing structure of loan portfolio The table below shows separate loan groups at their carrying amount. The Bank holds collateral against loans and receivables from customers in the form of mortgage interests over property, other registered securities over assets, and guarantees. ’000 LVL
Total
Of which not Of which past due by the following terms past due on Less than 31-90 91-180 More the reporting 30 days days days than 180 date days
Net carrying value of overdue loans
As at 31 December 2013 Net carrying amount Out of which impaired
86,701 36,039
52,236 18,292
17,266 8,785
11,528 3,321
2,047 2,017
3,624 3,624
34,465 17,747
As at 31 December 2012 Net carrying amount Out of which impaired
429,000 48,865
396,277 36,501
22,890 3,847
2,177 863
1,507 1,506
6,149 6,148
32,723 12,364
(b) Analysis of collateral The following table provides the analysis of loan portfolio, net of impairment and by types of collateral:
Commercial buildings Commercial assets pledge Land mortgage Mortgage on residential properties Traded securities Guarantee Deposit Other No collateral Total
31.12. 2013 ’000 LVL % of loan portfolio 36,612 42% 15,992 18% 7,671 9% 8,662 10% 0% 6,033 7% 0% 10,795 13% 936 1% 86,701 100%
31.12.2012 ’000 LVL 142,124 91,189 14,414 14,739 216 107,225 1,537 35,476 22,080 429,000
% of loan portfolio 33% 21.3% 3.4% 3.4% 0.1% 25% 0.4% 8.3% 5.1% 100%
The amounts shown in the table above represent the net carrying value of the loan, and do not necessarily represent the fair value of the collateral. Risk participation agreements Starting from the year 2009, the Bank concluded so called Risk Participation Agreements with UniCredit Bank Austria AG, which effectively transfers credit risk of specific selected loans to the parent bank. This selected portfolio amounted to LVL 12 million (net carrying amount) as at 31 December 2012. On July 2013 Risk participation agreements were terminated. In respect of termination of Risk participation agreements total amount of LVL 5 million was paid by UniCredit Bank Austria AG to Bank for allocation of specific provisions.
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35
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS (c) Impairment allowance analysis When reviewing loans the Bank sets the following categories for individual loans to assess their credit risk:
Standard Watch Substandard Doubtful Lost Collective portfolio impairment allowance Total
31.12.2012 ’000 LVL Gross Impairment allowance 402,777 108 14,698 2,920 25,261 11,160 11,313 8,077 3,081 3,056 2,809
31.12.2013 ’000 LVL Gross Impairment allowance 63,025 116 14,504 2,590 24,903 14,452 7,382 5,409 5,419 5,359 606 115,233
28,532
457,130
28,130
The Bank has estimated impairment for loans based on an analysis of the future cash flows of impaired loans and based on its past loss experience on portfolios of loans for which no indications of impairment have been identified. In determining the impairment allowance for loans, the following key assumptions were used: •
Probability of default values vary from 3.40% to 6.23%;
•
Loss Given Default values vary from 47.84% to 49.04%;
•
Management has assumed a time lag of 4 months to identify impairment after the loss triggering event.
(d) Movements in the impairment allowance Movements in the loan impairment allowance by classes of loans are as follows: 2013 ’000 LVL
2012 ’000 LVL
Specific allowance for impairment Balance at 1 January Charge for the year Recoveries Write-off Effect of foreign currency translation Other (Risk participation agreement related) Balance as at 31 December
25,321 9,112 (5,508) (5,789) (271) 5,061 27,926
32,967 5,663 (4,021) (8,999) (259) (30) 25,321
Collective allowance for impairment Balance as at 1 January Charge for the year Effect of foreign currency translation Balance as at 31 December Total allowance for impairment
2,809 (2,203) 606 28,532
2,921 (112) 2,809 28,130
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36
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS (e) Restructured loans During the year ended 31 December the Bank restructured loans in the total amount of: 31.12.2012 ’000 LVL 27,292 15,803 2,115 2,417 47,627
31.12.2013 ’000 LVL 8,982 5,500 2,258 22,565 39,305
Loan repayment term extension Principal payments waiver Interest waiver Other (incl. Interests capitalised) Total Significant credit exposures
As at 31 December 2013 and 2012 the Bank had 6 and 26 borrowers or groups of related borrowers, respectively, whose loan balances exceeded 10% of its equity. The gross value of these loans as of 31 December 2013 and 2012 was LVL 44,437 thousand and LVL 196,763 thousand, respectively.
20 DERIVATIVE FINANCIAL INSTRUMENTS The fair values of derivative instruments held for trading by the Bank as at 31December 2013: ’000 LVL Currency forwards Interest rate swaps Total derivative financial instruments
Contract/ notional amount -
Assets fair value -
Liabilities fair value -
-
-
-
Contract/ notional amount 104,613 9,815
Assets fair value 96 186
Liabilities fair value 840 183
114,428
282
1,023
Derivatives held for trading by the Bank as at 31 December 2012: ’000 LVL Currency forwards Interest rate swaps Total derivative financial instruments
21 CLASSIFICATION AND FAIR VALUE OF ASSETS AND LIABILITIES The estimated fair values of financial instruments at fair value through profit or loss, quoted available-for-sale assets and held to maturity investments are based on valuation techniques based on market observable inputs at the reporting date without any deduction for transaction costs. The estimated fair values of all other financial assets and liabilities are calculated using discounted cash flow techniques based on estimated future cash flows and management estiamtes on fair discount rates at the reporting date. The market for such assets are inactive. The actual sales transaction value could be different.. The management estimates that for financial assets and liabilities with short repricing terms, fair values are estimated to be equal to amortised cost. These include balances due from credit institutions and Bank of Latvia, balances due to credit institutions, subordinated liabilities and deposits from non-banking customers. Classification of assets and liabilities of the Bank as at 31 December 2013 was as follows:
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37
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS ’000 LVL
Assets Cash and deposits with the Bank of Latvia Demand balances due from credit institutions Held-to-maturity investments Loans and term deposits due from credit institutions Loans due from non-banking customers Held-for-trading financial assets Available-for-sale financial instruments Other assets Total ’000 LVL
Financial assets at amortised cost
Financial assets at fair value through profit and loss
Financial assets available for sale
Total
Fair value
55,272
-
-
55,272
55,272
3,644
-
-
3,644
3,644
-
-
-
-
-
74
-
-
74
74
86,701 1,302 146,993
-
-
86,701 1,302 146,993
86,734 1,302 147,026
Financial liabilities at amortised cost
Financial liabilities at fair value through profit and loss
Total
Fair value
93,145 -
-
93,145 -
93,145 -
93,145
-
93,145
93,145
Liabilities Demand balances due to credit institutions Held-for-trading financial liabilities Term deposits due to credit institutions Deposits from non-banking customers Subordinated liabilities Total
Classification of assets and liabilities of the Bank as at 31 December 2012 was as follows:
’000 LVL
Assets Cash and deposits with the Bank of Latvia Demand balances due from credit institutions Held-to-maturity investments Loans and term deposits due from credit institutions Loans due from non-banking customers Held-for-trading financial assets Available-for-sale financial instruments Other assets Total
Financial assets at amortised cost
Financial assets at fair value through profit and loss
Financial assets available for sale
Total
Fair value
20,838
-
-
20,838
20,838
87,899
-
-
87,899
87,899
3,124
-
-
3,124
3,055
2,824
-
-
2,824
2,824
429,000 715 544,400
282 282
28,512 28,512
429,000 282 28,512 715 573,194
429,160 282 28,512 715 573,285
_________________________________________________________________________________________________
38
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS
’000 LVL
Financial liabilities at amortised cost
Financial liabilities at fair value through profit and loss
Total
Fair value
11,186 184,846 294,169 17,457
1,023 -
11,186 1,023 184,846 294,169 17,457
11,186 1,023 184,846 294,169 17,457
507,658
1,023
508,681
508,681
Liabilities Demand balances due to credit institutions Held-for-trading financial liabilities Term deposits due to credit institutions Deposits from non-banking customers Subordinated liabilities Total 22 AVAILABLE FOR SALE FINANCIAL ASSETS
Short-term government bonds (Latvia) Short-term government bonds (Lithuania) Total available for sale financial assets
31.12.2013 ’000 LVL -
31.12.2012 ’000 LVL 11,288 17,224
-
28,512
23 PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS The following table shows the movements in the Bank’s property and equipment and intangible assets during the year ended 31 December 2013: ’000 LVL Leasehold Transport Equipment Intangible Total improvements vehicles assets Historical cost As at 31 December 2012 1,360 47 1,314 5,429 8,150 Additions 33 45 78 Disposals/ write off (1,360) (47) (1,059) (4,631) (7,097) As at 31 December 2013 288 843 1,131 Accumulated depreciation and amortization As at 31 December 2012 Charge for the year Depreciation of disposed assets As at 31 December 2013
1,255 33 (1,288)
27 2 (29)
1,168 40 (974)
4,418 359 (3,996)
6,868 434 (6,287)
-
-
234
781
1,015
As at 31 December 2012
105
20
146
1,011
1,282
As at 31 December 2013
-
-
54
62
116
Net book value
_________________________________________________________________________________________________
39
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS The following table shows the movements in the Bank’s property and equipment during the year ended 31 December 2012: ’000 LVL
Historical cost As at 31 December 2011 Additions Disposals/ write -off As at 31 December 2012
Leasehold improvements
Transport vehicles
Equipment
Intangible assets
Total
1,360 -
27 20 -
1,355 28 (69)
5,423 164 (158)
8,165 212 (227)
1,360
47
1,314
5,429
8,150
1,218 37 -
25 2 -
1,152 82 (66)
3,623 907 (112)
6,018 1,028 (178)
1,255
27
1,168
4,418
6,868
Net book value As at 31 December 2011
142
2
203
1,800
2,147
As at 31 December 2012
105
20
146
1,011
1,282
Accumulated depreciation and amortization As at 31 December 2011 Charge for the year Impairment losses As at 31 December 2012
24 OTHER ASSETS
Prepayments (advance payments for administrative expenses) Funds receivable from Risk participation Agreements Other assets Total other assets
31.12.2013 ’000 LVL 1,182 120 1,302
31.12.2012 ’000 LVL 111 604 715
25 DEMAND BALANCES AND TERM DEPOSITS DUE TO CREDIT INSTITUTIONS
Demand balances Term deposits Total demand balances and term deposits due to credit institutions
31.12.2013 ’000 LVL 93,145 93,145
31.12.2012 ’000 LVL 11,186 184,846 196,032
Concentration of deposits and balances from credit institutions As at 31 December 2013 and 2012 the Bank had one credit institution – the Bank’s immediate parent UniCredit Bank Austria AG - whose balance exceeded 10% of total deposits and balances from credit institutions. The gross value of these balances as of 31 December 2013 and 2012 were LVL 93,145 thousand and LVL 189,884 thousand, respectively.
_________________________________________________________________________________________________
40
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS 26 DEPOSITS FROM NON-BANKING CUSTOMERS 31.12.2013 ’000 LVL
31.12.2012 ’000 LVL
-
6,225 105,618
-
4,250 178,076 294,169
Current accounts and demand deposits - Individuals - Corporate Term deposits - Individuals - Corporate Total deposits from non-banking customers
Deposits from non-banking customers portfolio were transfered to Swedbank group as part of Bank “De-licensing” process. See Note 7. Blocked accounts As of 31 December 2013, the Bank had no customer deposit balances (2012: LVL 5,243 thousand) which were blocked by the Bank as collateral for loans, loan commitments and guarantees granted by the Bank. Concentrations of current accounts and customer deposits As of 31 December 2013 the Bank had no customers (2012: 3 customers) whose balances exceeded 10% of total customer accounts. The gross value of these balances as of 31 December 2012 was LVL 30,026 thousand.
27 OTHER LIABILITIES 31.12.2013 ’000 LVL 1,975 41 41 74 2,131
Accruals Deferred income Tax liabilities Other Total other liabilities
31.12.2012 ’000 LVL 1,156 849 122 518 2,645
28 DEFERRED TAX Deferred tax in amount of 4,241 million LVL arising from tax losses carried forward and other provisions has not been recognised in these financial statements due to uncertainty of utilisation of unused tax losses in the future periods. Deductible temporary differences, which have no expiry dates, are listed below at their tax effected accumulated values: 2013 2012 2013 2012 2013 2012 ’000 LVL Assets Property and equipment Other provisions
Liabilities
Net
-
-
(17)
(97)
(17)
(97)
357
477
-
-
357
477
Tax loss carry-forwards
3,900
3,894
-
-
3,900
3,894
Total deferred tax assets/(liabilities)
4,257
4,371
(17)
(97)
4,240
4,274
(4,257)
(4,371)
17
97
(4,240)
(4,274)
-
-
-
-
-
-
Unrecognised deferred tax assets Net deferred tax assets/(liabilities)
The rate of tax applicable for deferred taxes was 15% (2012: 15%).
_________________________________________________________________________________________________
41
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS 29 CAPITAL AND RESERVES Share capital Fully paid-in share capital is represented by ordinary shares with voting rights. The nominal value of one share is LVL 10 (2012: LVL 10). The Bank’s shareholder as at 31 December 2013 and 2012 was as follows: 31.12.2013 Share % of total capital share ’000 LVL capital 86,100 100%
UniCredit Bank Austria AG Total share capital
86,100
31.12.2012 Share % of total capital share ’000 LVL capital 86,100 100%
100%
86,100
100%
Revaluation reserve The revaluation reserve relates to revaluations on available-for-sale financial assets. ’000 LVL (32) 280 248 (248)
Balance as at 31 December 2011 Revaluation reserve increase Balance as at 31 December 2012 Revaluation reserve increase Balance as at 31 December 2013
-
30 SUBORDINATED LIABILITIES On 21 March 2006 a subordinated loan agreement between the Bank and UniCredit Bank Austria AG was signed. In case of a bankruptcy or insolvency of the Bank the claims of the UniCredit Bank Austria AG to receive payment from the Bank under this agreement shall be subordinated to the rights of all others creditors of the Bank to receive payment from the Bank under their unsubordinated claims against the Bank. Facility amount ‘000 LVL as at 31 December 2013 -
Maturity -
Interest rate -
as at 31 December 2012 7,040 10,417
Maturity 29 March 2013 29 March 2018
Interest rate 0.9097% 3.6090%
Subordinated capital was paid back to the shareholder as of 25 November 2013 within “De-licensing” process.
31 PROVISIONS
Accrual for vacations Provisions for guarantees Total provisions
31.12.2013 ’000 LVL 65 20
31.12.2012 ’000 LVL 110 3,256
85
3,366
_________________________________________________________________________________________________
42
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS
Movements in the provisions are as follows: 2013 ’000 LVL
2012 ’000 LVL
Provisions for guarantees Balance at 1 January Increase Decrease Balance as at 31 December
3,256 2,438 (5,674) 20
2,325 1,108 (177) 3,256
Accrual for vacation Balance as at 1 January Decrease Balance as at 31 December Total provisions
110 (45) 65 85
130 (20) 110 3,366
32 CASH AND CASH EQUIVALENTS
Cash and demand deposits with the Bank of Latvia Balances due from credit institutions Balances due to credit institutions Total cash and cash equivalents
31.12.2013 ’000 LVL 55,272 3,644 (52,730)
31.12.2012 ’000 LVL 20,838 87,899 (44,908)
6,186
63,829
33 RELATED PARTY TRANSACTIONS Related parties are defined as shareholder that controls the Bank, entities within the same group of companies as the Bank’s shareholder, members of the Supervisory Board and Management Board, key management personnel, their close relatives and companies in which they have a controlling interest as well as associated companies. (a) Control relationships The Bank’s immediate parent is UniCredit Bank Austria AG which controls 100% of the Bank’s shares. The party with ultimate control over the Bank is UniCredit S.P.A., Italy. This entity is listed on the Italian Stock Exchange, operated by Borsa Italiana S.p.A, (London Stock Exchange Group). (b) Transactions with members of the Management Board 2013 ’000 LVL
2012 ’000 LVL
Remuneration included in general administrative expenses
417
455
Total remuneration
417
455
The above amounts include cash and non-cash benefits in respect of members of the Management Board and social security contributions. The outstanding balances and average interest rates with members of the Management Board are as follows:
Loans to members of the Management Board
31.12.2013 ’000 LVL -
Total loans to members of the Management Board
-
Average Interest Rate -
31.12. 2012 ’000 LVL 10
Average Interest Rate 1.01%
10
_________________________________________________________________________________________________
43
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS (c) Transactions with related credit institutions (Parent) Balances due from related credit institutions are analyzed as follows:
Correspondent accounts Demand balances L/C loans deferred payments
31.12.2013 ’000 LVL 1,734 -
Total balances due from related credit institutions
Average Interest Rate -
1,734
31.12.2012 ’000 LVL 40,504 3,186 277
Average Interest Rate 0.20% -
43,967
Balances due to related credit institutions and deposits from other related parties are analyzed as follows:
Correspondent accounts Term deposits Total balances due to related credit institutions
31.12.2013 Average ’000 LVL Interest Rate 93,145 0.96% 93,145
31.12.2012 ’000 LVL 11,130 196,884
Average Interest Rate 0.04% 1.98%
208,014
Transactions with related credit institutions are analyzed as follows:
Interest income Interest expense Fee and commission income Fee and commission expense Total amount of transactions with related credit institutions
2013 ’000 LVL 16 (3,402) 73 (46)
2012 ’000 LVL 74 (5,411) 119 (1,104)
(3,359)
(6,322)
31.12.2013 ’000 LVL -
31.12.2012 ’000 LVL 8,034
-
8,034
31.12.2013 ’000 LVL -
31.12.2012 ’000 LVL 552
-
552
2013 ’000 LVL 144 15
2012 ’000 LVL 239 (1) 1
159
239
(d) Transactions with related company Balances due from related company are analysed as follows:
Loans Total balances due from related company Balances due to related company are analysed as follows:
Demand balances Total balances due to related company Transactions with related company are analysed as follows:
Interest income Interest expense Fee and commission income Total amount of transactions with related company
_________________________________________________________________________________________________
44
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS (e) Transactions with UniCredit Leasing Balances due from UniCredit Leasing are analysed as follows:
Loans Total balances due from UniCredit Leasing Balances due to UniCredit Leasing are analysed as follows:
Demand balances Total balances due to UniCredit Leasing Transactions with UniCredit Leasing are analysed as follows:
Interest income Interest expense Fee and commission income Total amount of transactions with UniCredit Leasing
31.12.2013 ’000 LVL -
31.12.2012 ’000 LVL 1,512
-
1,512
31.12 2013 ’000 LVL -
31.12.2012 ’000 LVL 4,072
-
4,072
2013 ’000 LVL 32 (2) 5
2012 ’000 LVL 139 (5) 7
35
141
(f) Administrative expenses Administrative expenses paid to related parties of UniCredit Group are analysed as follows:
Insurance services Payroll services Invoices to Software related services Logistic services Cars rental Advertising – promotional expenses Total administrative expenses paid to related parties
2013 ’000 LVL (6) (134) (523) (27) -
2012 ’000 LVL (6) (318) (543) (76) (23) (1)
(690)
(967)
During the financial year Bank had Risk Participation agreements with related party. For details see Note 19 section b. All transactions with related parties have been carried out using the arm’s length principle.
_________________________________________________________________________________________________
45
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS 34 CURRENCY ANALYSIS The Latvian banking legislation requires that open positions in each foreign currency may not exceed 10% of the Bank’s equity and that the total foreign currency open position may not exceed 20% of the equity. The following table provides the analysis of the Bank’s assets, liabilities and equity as well as memorandum items (foreign exchange – contractual amounts) outstanding as at 31 December 2013 by currency profile: LVL
EUR
USD
Other currencies
Total
55,272 108 -
2,990 -
286 -
260 -
55,272 3,644 -
54 45 10 55,489
70 81,715 17 1,200 85,992
4,859 5,145
4 127 92 483
74 86,701 54 62 1,302 147,109
-
-
-
-
-
65 2,002 51,748 53,815
87,870 20 117 88,007
5,152 6 5,158
123 6 129
93,145 85 2,131 51,748 147,109
Net long/ (short) position (before foreign exchange transactions) Claims arising from foreign exchange – contractual amounts Spot exchange transactions Forward foreign exchange transactions Total Liabilities arising from foreign exchange – contractual amounts Spot exchange transactions Forward foreign exchange transactions Total
1,674
(2,015)
(13)
354
-
-
-
-
-
-
-
-
-
-
-
Net long/ (short) position (foreign exchange transactions) Net long/ (short) position
1,674
(2,015)
(13)
354
-
31,614 85,138 (53,524)
452,752 382,921 69,831
30,128 43,358 (13,230)
59,982 63,059 (3,077)
574,476 574,476 -
59,645 6,121
(72,216) (2,385)
13,077 (153)
(898) (3,975)
(392) (392)
’000 LVL Assets Cash and balances due from the Bank of Latvia Demand balances due from credit institutions Held-to-maturity investments Loans and receivables: - Loans and term deposits due from credit institutions - Loans due from non-banking customers Held-for-trading financial assets Available-for-sale financial assets Property and equipment Intangible assets Corporate income tax receivable Other assets Total Liabilities and equity Demand balances due to credit institutions Held-for-trading financial liabilities Financial liabilities at amortised cost: - Term deposits due to credit institutions - Deposits from non-banking customers - Subordinated liabilities Provisions Other liabilities Equity Total
As at 31 December 2012 Total assets Total liabilities Net long/ (short) position (before foreign exchange transactions) Net long/ (short) position (foreign exchange transactions) Net long/ (short) position As at 31 December 2013 other currencies include mainly LTL.
_________________________________________________________________________________________________
46
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS The following table provides analysis of the Bank’s assets, liabilities and equity as well as memorandum items (foreign exchange – contractual amounts) outstanding as at 31 December 2012 by currency profile: EUR USD Other Total ’000 LVL LVL currencies Assets Cash and balances due from the Bank of Latvia 14,516 1,678 120 4,524 20,838 Demand balances due from credit institutions 52,605 7,168 28,126 87,899 Held-to-maturity investments 3,124 3,124 Loans and receivables: - Loans and term deposits due from credit institutions 2,002 822 2,824 - Loans due from non-banking customers 4,278 393,365 21,855 9,502 429,000 Held-for-trading financial assets 59 213 10 282 Available-for-sale financial assets 6,965 4,324 17,223 28,512 Property and equipment 147 34 90 271 Intangible assets 359 344 308 1,011 Corporate income tax receivable Other assets 164 189 163 199 715 Total 31,614 452,752 30,128 59,982 574,476 Liabilities and equity Demand balances due to credit institutions Held-for-trading financial liabilities Financial liabilities at amortised cost: - Term deposits due to credit institutions - Deposits from non-banking customers - Subordinated liabilities Provisions Other liabilities Equity Total Net long/ (short) position (before foreign exchange transactions) Claims arising from foreign exchange - contractual amounts Spot exchange transactions Forward foreign exchange transactions Total Liabilities arising from foreign exchange – contractual amounts Spot exchange transactions Forward foreign exchange transactions Total Net long/ (short) position (foreign exchange transactions) Net long/ (short) position As at 31 December 2011 Total assets Total liabilities Net long/ (short) position (before foreign exchange transactions Net long/ (short) position (foreign exchange transactions) Net long/ (short) position
341 816
10,802 183
-
43 24
23,148 28 1,021 59,784 85,138
184,846 182,456 3,274 1,360 382,921
25,826 17,457 75 43,358
(53,524)
69,831
(13,230)
696 68,714 69,410
7,889 352,113 360,002
2,284 18,375 20,659
9 10,878 7,144 446,346 7,153 457,224
9,765 9,765
2,918 429,300 432,218
158 7,424 7,582
7,834 10,910 217 446,706 8,051 457,616
59,645 6,121
(72,216) (2,385)
13,077 (153)
(898) (3,975)
32,911 84,797 (51,886)
452,183 420,780 31,403
40,314 48,773 (8,459)
60,736 586,144 31,794 586,144 28,942 -
59,486 7,600
(35,935) (4,532)
8,806 347
11,186 1,023
- 184,846 62,739 294,169 - 17,457 64 3,366 189 2,645 - 59,784 63,059 574,476 (3,077)
(31,883) (2,941)
As at 31 December 2011 other currencies include mainly LTL.
_________________________________________________________________________________________________
47
-
(392) (392)
474 474
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS 35 MATURITY ANALYSIS The table below allocates the Bank’s financial assets and liabilities to maturity groups based on the time remaining from the reporting date to the contractual maturity dates as at 31 December 2013: ’000 LVL
Assets Cash and balances due from the Bank of Latvia Demand balances due from credit institutions Held-to-maturity investments Loans and receivables: - Loans and term deposits due from credit institutions - Loans due from non-banking customers Held-for-trading financial assets Available-for-sale financial assets Other assets Total Liabilities Demand balances due to credit institutions Held-for-trading financial liabilities Financial liabilities at amortised cost: - Term deposits due to credit institutions - Deposits from non-banking customers Subordinated liabilities Total
Within 1 month
1–3 months
3–6 months
6 –12 months
1–5 years
Over 5 years or no maturity
55,272
-
-
-
-
-
55,272
3,644
-
-
-
-
-
3,644
-
-
-
-
-
-
-
-
-
-
-
-
74
74
8,453
6,060
17,316
13,275
32,742
8,855
86,701
-
-
-
-
-
-
-
17,316
13,275
32,742
8,929
1,302 146,993
1,302 68,671
6,060
Total
-
-
-
-
-
-
-
-
-
-
-
-
-
-
52,721
9
19,329
21,086
-
-
93,145
-
-
-
-
-
-
-
52,721
9
19,329
21,086
-
-
93,145
Net liquidity gap
15,950
6,051
(2,013)
(7,811)
32,742
8,929
53,848
As at 31 December 2012 Assets Liabilities
136,349 226,017
44,138 51,957
61,909 46,284
131,978 55,323
169,449 118,691
29,371 10,409
573,194 508,681
Net liquidity gap
(89,668)
(7,819)
15,625
76,655
50,758
18,962
64,513
_________________________________________________________________________________________________
48
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS The table below allocates the Bank’s financial assets and liabilities to maturity groups based on the time remaining from the reporting date to the contractual maturity dates as at 31 December 2012: ’000 LVL
Assets Cash and balances due from the Bank of Latvia Demand balances due from credit institutions Held-to-maturity investments Loans and receivables: - Loans and term deposits due from credit institutions - Loans due from non-banking customers Held-for-trading financial assets Available-for-sale financial assets Other assets Total Liabilities Demand balances due to credit institutions Held-for-trading financial liabilities Financial liabilities at amortised cost: - Term deposits due to credit institutions - Deposits from non-banking customers Subordinated liabilities Total
Within 1 month
1–3 months
3–6 months
6 –12 months
1–5 years
Over 5 years or no maturity
20,838
-
-
-
-
-
20,838
87,899
-
-
-
-
-
87,899
-
2,090
36
-
998
-
3,124
-
2,422
402
-
-
-
2,824
25,640
35,063
56,803
125,996
156,127
29,371
429,000
20 1,242
4 4,556
71 4,596
5,981
187 12,137
-
282 28,512
3 44,138
1 61,909
1 131,978
169,449
29,371
715 573,194
710 136,349
Total
11,186
-
-
-
-
-
11,186
23
9
137
622
232
-
1,023
16,925
16,797
28,133
21,084
101,907
-
184,846
197,867
28,117
18,014
33,617
16,552
2
294,169
16 226,017
7,034 51,957
46,284
55,323
118,691
10,407 10,409
17,457 508,681
(89,668)
(7,819)
15,625
76,655
50,758
18,962
64,513
As at 31 December 2011 Assets Liabilities
118,618 175,405
39,542 62,476
54,906 34,404
124,290 96,155
174,308 143,811
72,180 10,678
583,844 522,929
Net liquidity gap
(56,787)
(22,934)
20,502
28,135
30,497
61,502
60,915
Net liquidity gap
_________________________________________________________________________________________________
49
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS Analysis of financial liabilities’ contractual undiscounted cash flows The table below presents the cash flows payable by the Bank under contractual financial liabilities, including derivative financial liabilities, by remaining contractual maturities as at the reporting date. The amounts disclosed in the table are the contractual undiscounted cash flows in comparison with the carrying amounts of financial liabilities, comprising discounted cash flows as at the reporting date. The analysis as at 31 December 2013 was as follows: Financial instruments ’000 LVL Demand balances due to credit institutions Term deposits due to credit institutions Deposits from non-banking customers Held-for-trading financial liabilities Subordinated liabilities Commitments and contingencies Loan and credit line commitments Credit card commitments Guarantees and letters of credit Total
From 3 to 12 months -
Over 1 year
-
From 1 to 3 months -
93,330
52,741
72
40,517
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,071
1,071
321
-
-
750
4,999 99,215
4,999 99,400
1,628 54,690
72
3,318 43,835
53 803
Carrying amount
Contractual cash flows
Up to 1 month
11,186
11,186
From 3 to 12 months -
Over 1 year
11,186
From 1 to 3 months -
184,846
192,737
16,957
17,207
51,466
107,107
294,169
294,825
197,883
28,195
51,956
16,791
1,023
1,023
23
9
759
232
17,457
19,469
38
7,105
287
12,039
128,286
128,286
12,829
12,829
12,829
89,799
697 154,170 761,834
697 154,170 802,393
4,335 243,251
16,236 81,581
697 56,816 174,810
76,783 302,751
Carrying amount
Contractual cash flows
Up to 1 month
-
-
93,145
-
The analysis as at 31 December 2012 was as follows: Financial instruments ’000 LVL Demand balances due to credit institutions Term deposits due to credit institutions Deposits from non-banking customers Held-for-trading financial liabilities Subordinated liabilities Commitments and contingencies Loan and credit line commitments Credit card commitments Guarantees and letters of credit Total
-
_________________________________________________________________________________________________
50
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS 36 INTEREST RATE REPRICING ANALYSIS The table below allocates the Bank’s financial assets, liabilities and memorandum items to interest rate re-pricing maturity group as at 31 December 2013: Within 1 month
1–3 months
3–6 months
6 – 12 months
1–5 years
Over 5 years
Noninterest bearing
Total
55,272
-
-
-
-
-
-
55,272
3,644
-
-
-
-
-
-
3,644
-
-
-
-
-
-
-
-
-
-
-
-
-
-
74
74
18,270 -
44,214 -
17,388 -
3,682 -
2,355 -
194 -
77,186
44,214
17,388
3,682
2,355
194
598 1,302 1,974
86,701 1,302 146,993
-
-
-
-
-
-
-
-
52,715 52,715
-
19,337 19,337
21,093 21,093
-
-
-
93,145 93,145
24,471
44,214
(1,949)
(17,411)
2,355
194
1,974
53,848
Claims arising from Interest Rate Swapcontractual amounts Interest Rate Swap
-
-
-
-
-
-
-
-
Liabilities arising from Interest Rate Swap- contractual amounts Interest Rate Swap
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
185,202 210,755 (25,553)
170,654 87,765 82,889
92,638 46,300 46,338
99,864 34,238 65,626
16,214 60,464 (44,250)
4,631 10,424 (5,793)
3,991 58,735 (54,744)
573,194 508,681 64,513
-
-
-
-
-
-
-
-
(25,553)
82,889
46,338
65,626
(44,250)
(5,793)
(54,744)
64,513
’000 LVL
Assets Cash and balances due from the Bank of Latvia Demand balances due from credit institutions Held-to-maturity investments Loans and receivables: - Loans and term deposits due from credit institutions - Loans due from non-banking customers Held-for-trading financial assets Available-for-sale financial assets Other assets Total Liabilities Demand balances due to credit institutions Held-for-trading financial liabilities Financial liabilities at amortised cost: - Term deposits due to credit institutions - Deposits from non-banking customers Subordinated liabilities Total Total interest sensitivity gap (on balance sheet)
Total interest repricing gap (off-balance sheet) Total interest repricing gap As at 31 December 2012 Total assets Total liabilities Total interest repricing gap (on balance sheet) Total interest repricing gap (off-balance sheet) Total interest repricing gap
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51
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS The table below allocates the Bank’s assets, liabilities and memorandum items to interest rate re-pricing maturity group as at 31 December 2012: ’000 LVL 1–3 months
Within 1 month Assets Cash and balances due from the Bank of 20,838 Latvia Demand balances due from credit 87,899 institutions Held-to-maturity investments Loans and receivables: - Loans and term deposits due from credit institutions - Loans due from non-banking 75,138 customers Held-for-trading financial assets 20 Available-for-sale financial assets 1,307 Other assets Total 185,202
3–6 months
6 – 12 months
1–5 years
Over 5 years
Noninterest bearing
Total
-
-
-
-
-
-
20,838
-
-
-
-
-
-
87,899
2,090
-
-
1,034
-
-
3,124
2,422
402
-
-
-
-
2,824
161,369
87,346
93,868
7,569
434
3,276
429,000
4 4,769 170,654
258 4,632 92,638
5,996 99,864
7,611 16,214
4,197 4,631
715 3,991
282 28,512 715 573,194
10,676
-
-
-
-
-
510
11,186
23
9
137
622
232
-
-
1,023
59,165
37,781
28,133
-
59,767
-
-
184,846
140,891
42,941
18,030
33,616
465
1
58,225
294,169
210,755
7,034 87,765
46,300
34,238
60,464
10,423 10,424
58,735
17,457 508,681
(25,553)
82,889
46,338
65,626 (44,250)
(5,793) (54,744)
64,513
Claims arising from Interest Rate Swap – contractual amounts Interest Rate Swap
-
-
9,815
-
-
-
-
9,815
Liabilities arising from Interest Rate Swap – contractual amounts Interest Rate Swap
-
-
9,815
-
-
-
-
9,815
-
-
-
-
-
-
-
-
(25,553)
82,889
65,984
65,626 (44,250)
(5,793) (54,744)
64,513
183,224 166,425 278,044 180,162 (94,820) (13,737)
95,731 33,261 62,470
90,361 29,038 61,323
17,535 2,424 15,111
10,288 10,288
20,280 20,280
583,844 522,929 60,915
-
3,514
(3,514)
-
-
-
-
(94,820) (13,737)
65,984
57,809
15,111
10,288
20,280
60,915
Liabilities Demand balances due to credit institutions Held-for-trading financial liabilities Financial liabilities at amortised cost: - Term deposits due to credit institutions - Deposits from non-banking customers Subordinated liabilities Total Total interest sensitivity gap (on balance sheet)
Total interest repricing gap (offbalance sheet) Total interest sensitivity gap As at 31 December 2011 Total assets Total liabilities Total interest repricing gap (on balance sheet) Total interest repricing gap (offbalance sheet) Total interest repricing gap
-
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52
AS “UniCredit Finance” (previously AS “UniCredit Bank”) Annual Report for the year ended 31 December 2013 NOTES TO FINANCIAL STATEMENTS 37 LITIGATIONS In the ordinary course of business, the Bank is subject to legal actions and disputes. Management believes that the resulting liability, if any, arising from such actions or disputes, will not have a material adverse effect on the financial conditions of the results of future operations of the Bank. 38 COMMITMENTS AND CONTINGENCIES At any time the Bank has outstanding commitments to extend credit. These commitments take the form of approved loans and credit card limits and overdraft facilities. The Bank provides financial guarantees and letters of credit to guarantee the performance of customers to third parties. These agreements have fixed limits and generally extend for a period of up to ten years. The contractual amounts of commitments are set out in the following table by category. The amounts reflected in the table for commitments assume that amounts are fully advanced. The amounts reflected in the table for guarantees and letters of credit represent the maximum accounting loss that would be recognised at the reporting date if counterparties failed completely to perform as contracted.
Loan and credit line commitments Credit card commitments Guarantees and letters of credit Total commitments and contingencies
31.12.2013 ’000 LVL 1,071 4,999
31.12.2012 ’000 LVL 128,286 697 154,170
6,070
283,153
The total outstanding contractual commitments to extend credit indicated above does not necessarily represent future cash requirements, as these commitments may expire or terminate without being funded. Part of loan portfolio were transfered to Swedbank group as part of Bank “De-licensing” process. See Note 7. 39 OPERATING LEASES Leases as lessee Non-cancellable operating lease rentals are payable as follows:
Less than one year 1 – 5 years Total
31.12.2013 ’000 LVL 28 72
31.12.2012 ’000 LVL 35 174
100
209
The Bank leases a number of equipment under operating lease. The leases typically run for an initial period of five to ten years, with an option to renew the lease after that date. Lease payments are usually increased annually to reflect market rentals. None of the leases includes contingent rentals. During the current year LVL 42 thousand was recognised as an expense in the income statement in respect of operating leases (2012: LVL 44 thousand). 40 SUBSEQUENT EVENTS Financial and Capital Market Commission annulled the license for performance of credit institution from 1 January 2014. 42 employees were dismissed as of 31.01.2014. Following the de-licensing the company`s name was changed to AS UniCredit Finance and the company intends to manage the remaining customer loans until merger with SIA UniCredit Leasing. The Bank successfully completed the project on EURO conversion and implemented all local requirements including all required changes for Credit Register in due time.
_________________________________________________________________________________________________
53
