BNP PARIBAS BANK International Financial Reporting Standards Financial Statements and Independent Auditor’s Report 31 December 2009
BNP Paribas Bank
CONTENTS INDEPENDENT AUDITOR’S REPORT FINANCIAL STATEMENTS Statement of Statement of Statement of Statement of
Financial Position ............................................................................................................................................1 Comprehensive Income ..................................................................................................................................2 Changes in Equity ...........................................................................................................................................3 Cash Flows ......................................................................................................................................................4
Notes to the Financial Statements 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Introduction.................................................................................................................................................................5 Operating Environment of the Bank..........................................................................................................................5 Summary of Significant Accounting Policies ............................................................................................................6 Critical Accounting Estimates, and Judgements in Applying Accounting Policies...............................................14 Adoption of New or Revised Standards and Interpretations .................................................................................15 New Accounting Pronouncements..........................................................................................................................17 Cash and Cash Equivalents ....................................................................................................................................20 Due from Other Banks .............................................................................................................................................22 Loans and Advances to Customers........................................................................................................................23 Investment Securities Available for Sale ................................................................................................................27 Premises, Equipment and Intangible Assets..........................................................................................................28 Other Assets.............................................................................................................................................................29 Due to Other Banks .................................................................................................................................................29 Customer Accounts..................................................................................................................................................29 Other Liabilities.........................................................................................................................................................30 Subordinated Debt...................................................................................................................................................31 Share Capital............................................................................................................................................................31 Other Reserves ........................................................................................................................................................32 Interest Income and Expense..................................................................................................................................32 Fee and Commission Income and Expense...........................................................................................................33 Administrative and Other Operating Expenses......................................................................................................33 Income Taxes...........................................................................................................................................................34 Segment Analysis ....................................................................................................................................................35 Financial Risk Management....................................................................................................................................37 Management of Capital............................................................................................................................................56 Contingencies and Commitments ...........................................................................................................................56 Derivative Financial Instruments .............................................................................................................................59 Fair Value of Financial Instruments ........................................................................................................................60 Presentation of Financial Instruments by Measurement Category .......................................................................62 Related Party Transactions .....................................................................................................................................64
BNP Paribas Bank Statement of Comprehensive Income In thousands of Russian Roubles
Note
2009
2008
Interest income Interest expense
19 19
3 347 058 (1 888 359)
3 040 510 (1 924 058)
Net interest income Provision for loan impairment
8,9
1 458 699 (564 361)
1 116 452 (179 647)
894 338
936 805
20 20
517 402 (500 846) 1 314 984 210 616 932 370
253 653 (358 042) 804 936 333 066 846 037
18 9 21
(354) 4 196 (1 968 325)
(30 808) 505 (1 662 530)
22
1 404 381 (306 281)
1 123 622 (298 717)
1 098 100
824 905
Net interest income after provision for loan impairment Fee and commission income Fee and commission expense Gains less losses from financial derivatives Gains less losses from trading in foreign currencies Foreign exchange translation gains less losses Losses net of gains from disposal of investment securities available for sale Gains less losses from disposal of loan portfolio Other operating income Administrative and other operating expenses Profit before tax Income tax expense Profit for the year Other comprehensive income: Available-for-sale investments: - Gains less losses/(losses net of gains) arising during the year - Income tax (credited)/recorded directly in other comprehensive income
22
Other comprehensive income/(expense) for the year Total comprehensive income for the year
The notes set out on pages 5 to 65 form an integral part of these financial statements.
74 837
(55 859)
(14 967)
12 080
59 870
(43 779)
1 157 970
781 126
2
BNP Paribas Bank Statement of Changes in Equity Note Share capital
Share premium
Fair value reserve for investment securities available for sale
Retained earnings
Total equity
1 773 900
371 538
17 256
646 043
2 808 737
-
-
(43 779)
824 905
781 126
1 773 900
371 538
(26 523)
1 470 948
3 589 863
-
-
59 870
1 098 100
1 157 970
1 773 900
371 538
33 347
2 569 048
4 747 833
In thousands of Russian Roubles Balance at 1 January 2008 Total comprehensive income for 2008
18
Balance at 31 December 2008 Total comprehensive income for 2009 Balance at 31 December 2009
18
The notes set out on pages 5 to 65 form an integral part of these financial statements.
3
BNP Paribas Bank Statement of Cash Flows In thousands of Russian Roubles
Note
2009
Cash flows from operating activities Interest received Interest paid Fees and commissions received Fees and commissions paid Gains less losses from trading in foreign currencies Gains less losses from trading in derivatives Staff costs paid Administrative and other operating expenses paid Income tax paid
3 506 828 (2 066 615) 389 153 (500 846) 210 616 (255 620) (1 233 753) (506 873) (275 928)
Cash flows (used in)/ received from operating activities before changes in operating assets and liabilities
(733 038)
Changes in operating assets and liabilities Net (increase)/decrease in mandatory cash balances Net decrease in due from other banks Net decrease/(increase) in loans and advances to customers Net decrease/(increase) in other financial assets Net decrease/(increase) in other non-financial assets Net (decrease)/ increase in due to other banks Net (decrease)/increase in customer accounts Net increase in other financial liabilities Net increase in other non-financial liabilities
2 912 849 (1 836 033) 269 493 (362 197) 333 066 1 839 379 (989 234) (584 776) (251 940)
1 330 607
(128 523) 131 644 25 128 728 7 670 87 958 (29 697 290) (3 514 394) 830 47 199
403 765 275 355 (10 160 050) (9 426) (26 328) 6 227 647 9 184 426 4 460 96 553
(8 669 216)
7 327 009
Net cash (used in)/received from operating activities Cash flows from investing activities Acquisition of investment securities available for sale Proceeds from disposal and redemption of investment securities available for sale Acquisition of premises and equipment Acquisition of intangible assets
2008
10 10 11 11
Net cash (used in)/received from investing activities
(1 277 042)
(66 382)
636 009 (21 719) (48 570)
2 131 099 (61 173) (131 879)
(711 322)
1 871 665
Cash flows from financing activities Proceeds from subordinated debt
-
1 096 936
Net cash received from financing activities
-
1 096 936
Effect of exchange rate changes on cash and cash equivalents Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year
7
The notes set out on pages 5 to 65 form an integral part of these financial statements.
(318 430)
2 125 020
(9 698 968) 17 579 506
12 420 630 5 158 876
7 880 538
17 579 506
4
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 1
Introduction
These financial statements have been prepared in accordance with International Financial Reporting Standards for the year ended 31 December 2009 for BNP Paribas Bank (the “Bank”). The Bank was incorporated and is domiciled in the Russian Federation. The Bank is a closed joint-stock company and was set up in accordance with Russian regulations. Principal activity. The Bank’s principal business activity is commercial banking operations within the Russian Federation. The Bank accepts deposits from the legal entities and extends loans, transfers payments in Russia and abroad, exchanges currencies, trades derivative financial instruments and provides other banking services to its commercial customers. The Bank has operated under a full banking license № 3407 issued by the Central Bank of the Russian Federation (“CBRF”) since 10 July 2002. The Bank participates in the state deposit insurance scheme, which was introduced by the Federal Law #177-FZ “Deposits of individuals insurance in Russian Federation” dated 23 December 2003. The State Deposit Insurance Agency guarantees repayment of 100% of individual deposits up to RR 700 thousand (prior to 1 October 2008: 100% up to RR 100 thousand and 90% in excess of RR 100 thousand up to a limit of RR 400 thousand) per individual in case of the withdrawal of a licence of a bank or a CBRF imposed moratorium on payments. The Bank is directly and ultimately controlled by BNP Paribas S. A. (incorporated in France) (the “Parent Bank”), which owns 100% of the ordinary shares. Being a subsidiary of BNP Paribas S.A., the Bank is a part of the international banking network of BNP Paribas. Registered address and place of business. The Bank’s registered address is 1/2 B.Gnezdnikovsky per., Moscow, 125009, Russian Federation. The average number of the Bank’s employees during the year was 1 231 (2008: 817). Presentation currency. These financial statements are presented in thousands of Russian Roubles ("RR thousands"). The Bank has two 100%-owned Russia based subsidiaries: CJSC BNP Paribas Leasing and CJSC BNP Paribas Commodities, which are not material and are currently in liquidation process. These subsidiaries have not been consolidated and have been accounted at cost in these financial statements. 2
Operating Environment of the Bank
The Russian Federation displays certain characteristics of an emerging market, including relatively high inflation and high interest rates. Despite strong economic growth in recent years, the financial situation in the Russian financial and corporate sectors significantly deteriorated since mid-2008. The global financial crisis has had a severe effect on the Russian economy: -
Lower commodity prices have resulted in lower income from exports and thus lower domestic demand. Russia’s economy contracted in 2009.
-
The rise in Russian and emerging market risk premia resulted in a steep increase in foreign financing costs.
-
The depreciation of the Russian Rouble against hard currencies (compared to RR 25.3718 for 1 US Dollar at 1 October 2008) increased the burden of foreign currency corporate debt, which has risen considerably in recent years.
-
As part of preventive steps to ease the effects of the situation in financial markets on the economy, the Government incurred a large fiscal deficit in 2009.
Management is unable to predict all developments which could have an impact on the banking sector and the wider economy and consequently what effect, if any, they could have on the future financial position of the Bank. The amount of provision for impaired loans is based on management's appraisals of these assets at the end of the reporting period after taking into consideration the cash flows that may result from foreclosure less costs for obtaining and selling the collateral. 5
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 2
Operating Environment of the Bank (Continued)
Borrowers of the Bank were adversely affected by the financial and economic environment, which in turn has had an impact on their ability to repay the amounts owed. Deteriorating economic conditions for borrowers were reflected in revised estimates of expected future cash flows in impairment assessments. The market in Russia for many types of collateral, especially real estate, has been severely affected by the volatile global financial markets, resulting in a low level of liquidity for certain types of assets. As a result, the actual realisable value on future foreclosure may differ from the value ascribed in estimating allowances for impairment at the end of the reporting period. Under IFRS, impairment losses on financial assets expected as a result of future events, no matter how likely, cannot be recognised until such events arise. The volume of wholesale financing available in particular from overseas has significantly reduced since August 2007. Such circumstances may affect the ability of the Bank to obtain new borrowings and refinance its existing borrowings at terms and conditions similar to those applied to earlier transactions. The tax, currency and customs legislation within the Russian Federation is subject to varying interpretations and frequent changes. Furthermore, the need for further developments in the bankruptcy laws, the absence of formalised procedures for the registration and enforcement of collateral, and other legal and fiscal impediments contribute to the challenges faced by banks currently operating in the Russian Federation. The future economic direction of the Russian Federation is largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the Government, together with tax, legal, regulatory and political developments. Management believes it is taking all the necessary measures to support the sustainability and development of the Bank’s business in the current circumstances. 3
Summary of Significant Accounting Policies
Basis of preparation. These financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) under the historical cost convention, as modified by the i nitial recognition of financial instruments based on fair value, and by the revaluation of available-for-sale financial assets, and financial instruments categorised as at fair value through profit or loss, as well as by the fair value hedge accounting adjustments relating to financial assets and liabilities being hedged. The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated (refer to Note 5). Financial instruments - key measurement terms. Depending on their classification financial instruments are carried at fair value, or amortised cost as described below. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Fair value is the current bid price for financial assets and current asking price for financial liabilities which are quoted in an active market. For assets and liabilities with offsetting market risks, the Bank may use mid-market prices as a basis for establishing fair values for the offsetting risk positions and apply the bid or asking price to the net open position as appropriate. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange or other institution and those prices represent actual and regularly occurring market transactions on an arm’s length basis. Valuation techniques such as discounted cash flows models or models based on recent arm’s length transactions or consideration of financial data of the investees are used to fair value certain financial instruments for which external market pricing information is not available. Valuation techniques may require assumptions not supported by observable market data. Disclosures are made in these financial statements if changing any such assumptions to a reasonably possible alternative would result in significantly different profit, income, total assets or total liabilities.
6
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 3
Summary of Significant Accounting Policies (Continued)
Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument. An incremental cost is one that would not have been incurred if the transaction had not taken place. Transaction costs include fees and commissions paid to agents (including employees acting as selling agents), advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs. Amortised cost is the amount at which the financial instrument was recognised at initial recognition less any principal repayments, plus accrued interest, and for financial assets less any write-down for incurred impairment losses. Accrued interest includes amortisation of transaction costs deferred at initial recognition and of any premium or discount to maturity amount using the effective interest method. Accrued interest income and accrued interest expense, including both accrued coupon and amortised discount or premium (including fees deferred at origination, if any), are not presented separately and are included in the carrying values of related items in the statement of financial position. The effective interest method is a method of allocating interest income or interest expense over the relevant period so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future credit losses) through the expected life of the financial instrument or a shorter period, if appropriate, to the net carrying amount of the financial instrument. The effective interest rate discounts cash flows of variable interest instruments to the next interest repricing date except for the premium or discount which reflects the credit spread over the floating rate specified in the instrument, or other variables that are not reset to market rates. Such premiums or discounts are amortised over the whole expected life of the instrument. The present value calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate. Initial recognition of financial instruments. Derivatives are initially recorded at fair value. All other financial instruments are initially recorded at fair value plus transaction costs. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference between fair value and transaction price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets. All purchases and sales of financial assets that require delivery within the time frame established by regulation or market convention (“regular way” purchases and sales) are recorded at trade date, which is the date that the Bank commits to deliver a financial asset. All other purchases are recognised when the Bank becomes a party to the contractual provisions of the instrument. Derecognition of financial assets. The Bank derecognises financial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expired or (b) the Bank has transferred the rights to the cash flows from the financial assets or entered into a qualifying pass-through arrangement while (i) also transferring substantially all the risks and rewards of ownership of the assets or (ii) neither transferring nor retaining substantially all risks and rewards of ownership but not retaining control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose restrictions on the sale. Cash and cash equivalents. Cash and cash equivalents are items which are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Cash and cash equivalents include all interbank placements with original maturities of less than three months. Funds restricted for a period of more than three months on origination are excluded from cash and cash equivalents. Cash and cash equivalents are carried at amortised cost. Mandatory cash balances with the CBRF. Mandatory cash balances with the CBRF are carried at amortised cost and represent non-interest bearing mandatory reserve deposits which are not available to finance the Bank’s day to day operations and hence are not considered as part of cash and cash equivalents for the purposes of the statement of cash flows. Due from other banks. Amounts due from other banks are recorded when the Bank advances money to counterparty banks with no intention of trading the resulting unquoted non-derivative receivable due on fixed or determinable dates. Amounts due from other banks are carried at amortised cost. 7
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 3
Summary of Significant Accounting Policies (Continued)
Loans and advances to customers. Loans and advances to customers are recorded when the Bank advances money to purchase or originate an unquoted non-derivative receivable from a customer due on fixed or determinable dates and has no intention of trading the receivable. Loans and advances to customers are carried at amortised cost. Impairment of financial assets carried at amortised cost. Impairment losses are recognised in profit or loss for the year when incurred as a result of one or more events (“loss events”) that occurred after the initial recognition of the financial asset and which have an impact on the amount or timing of the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. If the Bank determines that no objective evidence exists that impairment was incurred for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. The primary factors that the Bank considers in determining whether a financial asset is impaired are its overdue status and realisability of related collateral, if any. The following other principal criteria are also used to determine whether there is objective evidence that an impairment loss has occurred: -
any instalment is overdue and the late payment cannot be attributed to a delay caused by the settlement systems;
-
the borrower experiences a significant financial difficulty as evidenced by the borrower’s financial information that the Bank obtains;
-
the borrower considers bankruptcy or a financial reorganisation;
-
there is an adverse change in the payment status of the borrower as a result of changes in the national or local economic conditions that impact the borrower; or
-
the value of collateral significantly decreases as a result of deteriorating market conditions.
For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets and the experience of management in respect of the extent to which amounts will become overdue as a result of past loss events and the success of recovery of overdue amounts. Past experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect past periods and to remove the effects of past conditions that do not exist currently. If the terms of an impaired financial asset held at amortised cost are renegotiated or otherwise modified because of financial difficulties of the borrower or issuer, impairment is measured using the original effective interest rate before the modification of terms. Impairment losses are always recognised through an allowance account to write down the asset’s carrying amount to the present value of expected cash flows (which exclude future credit losses that have not been incurred) discounted at the original effective interest rate of the asset. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account through profit or loss for the year. Uncollectible assets are written off against the related impairment loss provision after all the necessary procedures to recover the asset have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are credited to impairment loss account in profit or loss for the year. 8
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 3
Summary of Significant Accounting Policies (Continued)
Credit related commitments. The Bank enters into credit related commitments, including letters of credit and financial guarantees. Financial guarantees represent irrevocable assurances to make payments in the event that a customer cannot meet its obligations to third parties and carry the same credit risk as loans. Financial guarantees and commitments to provide a loan are initially recognised at their fair value, which is normally evidenced by the amount of fees received. This amount is amortised on a straight line basis over the life of the commitment, except for commitments to originate loans if it is probable that the Bank will enter into a specific lending arrangement and does not expect to sell the resulting loan shortly after origination; such loan commitment fees are deferred and included in the carrying value of the loan on initial recognition. At the end of each reporting period, the commitments are measured at the higher of (i) the remaining unamortised balance of the amount at initial recognition and (ii) the best estimate of expenditure required to settle the commitment at the end of each reporting period. Investment securities available for sale. This classification includes investment securities which the Bank intends to hold for an indefinite period of time and which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. Investment securities available for sale are carried at fair value. Interest income on available-for-sale debt securities is calculated using the effective interest method and recognised in profit or loss for the year. All other elements of changes in the fair value are recognised in other comprehensive income until the investment is derecognised or impaired, at which time the cumulative gain or loss is reclassified from other comprehensive income to profit or loss for the year. Impairment losses are recognised in profit or loss for the year when incurred as a result of one or more events (“loss events”) that occurred after the initial recognition of investment securities available for sale. The cumulative impairment loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that asset previously recognised in profit or loss – is reclassified from other comprehensive income to profit or loss for the year. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through profit or loss for the year. Subsidiaries. Subsidiaries are those companies and other entities in which the Bank, directly or indirectly, has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies so as to obtain benefits. Premises and equipment. Premises and equipment are stated at cost less accumulated depreciation and provision for impairment, where required. Costs of minor repairs and maintenance are expensed when incurred. Costs of replacing major parts or components of premises and equipment items are capitalised and the replaced part is retired. At the end of each reporting period management assesses whether there is any indication of impairment of premises and equipment. If any such indication exists, management estimates the recoverable amount, which is determined as the higher of an asset’s fair value less costs to sell and its value in use. The carrying amount is reduced to the recoverable amount and the impairment loss is recognised in profit or loss for the year. An impairment loss recognised for an asset in prior years is reversed if there has been a change in the estimates used to determine the asset’s value in use or fair value less costs to sell. Gains and losses on disposals determined by comparing proceeds with carrying amount are recognised in profit or loss for the year (within other operating income or expenses). Depreciation. Depreciation is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives: Useful lives in years Equipment Computers Vehicles Computer software licences Leasehold improvements Other
5 3 5 3 over the term of the underlying lease 5
9
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 3
Summary of Significant Accounting Policies (Continued)
The residual value of an asset is the estimated amount that the Bank would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. Intangible assets. The Bank’s intangible assets have definite useful life and primarily include capitalised computer software and licenses. Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring them to use. Development costs that are directly associated with identifiable and unique software controlled by the Bank are recorded as intangible assets if an inflow of incremental economic benefits exceeding costs is probable. Capitalised costs include staff costs of the software development team and an appropriate portion of relevant overheads. All other costs associated with computer software, e.g. its maintenance, are expensed when incurred. Capitalised computer software is amortised on a straight line basis over expected useful lives of 1 to 10 years. Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Development costs that are directly associated with identifiable and unique software controlled by the Bank are recorded as intangible assets if the inflow of incremental economic benefits exceeding costs is probable. Capitalised costs include staff costs of the software development team and an appropriate portion of relevant overheads. All other costs associated with computer software, e.g. its maintenance, are expensed when incurred. Capitalised computer software is amortised on a straight line basis over expected useful lives of 1 to 10 years. Operating leases. Where the Bank is a lessee in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the lessor to the Bank, the total lease payments are charged to profit or loss for the year (rental expense) on a straight-line basis over the period of the lease. Finance lease liabilities. Where the Bank is a lessee in a lease which transferred substantially all the risks and rewards incidental to ownership to the Bank, the assets leased are capitalised in premises and equipment at the commencement of the lease at the lower of the fair value of the leased asset and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of future finance charges, are included in other borrowed funds. The interest cost is charged to profit or loss for the year over the lease period using the effective interest method. The assets acquired under finance leases are depreciated over their useful life or the shorter lease term if the Bank is not reasonably certain that it will obtain ownership by the end of the lease term. Due to other banks. Amounts due to other banks are recorded when money or other assets are advanced to the Bank by counterparty banks. The non-derivative liability is carried at amortised cost. If the Bank purchases its own debt, the liability is removed from the statement of financial position and the difference between the carrying amount of the liability and the consideration paid is included in gains or losses arising from early retirement of debt. Customer accounts. Customer accounts are non-derivative liabilities to individuals, state or corporate customers and are carried at amortised cost. Subordinated debt. Subordinated debt is a non-derivative liability carried at amortised cost. The subordinated debt ranks after all other creditors in case of liquidation. Derivative financial instruments and hedge accounting. Derivative financial instruments, including foreign exchange contracts, interest rate futures, forward rate agreements, currency and interest rate swaps, currency and interest rate options are carried at their fair value. All derivative instruments are carried as assets when fair value is positive and as liabilities when fair value is negative. Changes in the fair value of derivative instruments are included in profit or loss for the year (gains less losses on derivatives).
10
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 3
Summary of Significant Accounting Policies (Continued)
The Bank designates certain derivatives as fair value hedges of interest rate and foreign currency risk associated with certain loans, available for sale assets and financial liabilities. Hedge accounting is applied to the hedging used for derivatives and the hedged items designated in this way provided that the hedge accounting certain criteria are met. The Bank documents, at the inception of the transaction, the relationship between the hedged items and hedging instruments, as well as its risk management objective and strategy for undertaking the hedge. The Bank also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting the exposures to the hedged risks. For the fair value hedge the hedged item is adjusted for the changes in its fair value attributable to the risk being hedged and those fair value changes are recognised in the statement of comprehensive income. The gains or losses relating to the hedging derivative are offset, in the profit or loss for the year, by the fair value gains and losses on the hedged item to the extent that the hedge is effective. The ineffective portion of the fair value changes is recognised immediately in the profit or loss for the year. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is ceased and it is amortised to profit or loss over the period to maturity and recorded as net interest income. In order to assess hedge effectiveness the Bank regularly performs two kinds of effectiveness tests: prospective effectiveness test (a forward-looking test of whether a hedging relationship is expected to be highly effective in future periods); and retrospective effectiveness test (a backward-looking test of whether a hedging relationship has actually been highly effective in a past period). Both tests need to be performed and met at each reporting date, for hedge accounting to be available. A hedge is regarded as highly effective only if both of the following conditions are met: –
At the inception of the hedge and in subsequent periods, the hedge is expected to be highly effective in achieving offsetting changes in present values of cash flows attributable to the hedged risk during the period for which the hedge is designated – prospective effectiveness test, range of 80%-125% is used; and
–
The actual results of the hedge show that the required offset has been achieved – retrospective effectiveness test, range of 80%-125% is used.
Income taxes. Income taxes have been provided for in the financial statements in accordance with legislation enacted or substantively enacted by the end of the reporting period. The income tax charge comprises current tax and deferred tax and is recognised in profit or loss for the year except if it is recognised in other comprehensive income or directly in equity because it relates to transactions that are also recognised, in the same or a different period, in other comprehensive income or directly in equity. Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect of taxable profits or losses for the current and prior periods. Taxable profits or losses are based on estimates if financial statements are authorised prior to filing relevant tax returns. Taxes other than on income are recorded within administrative and other operating expenses. Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. In accordance with the initial recognition exemption, deferred taxes are not recorded for temporary differences on initial recognition of an asset or a liability in a transaction other than a business combination if the transaction, when initially recorded, affects neither accounting nor taxable profit. Deferred tax balances are measured at tax rates enacted or substantively enacted at the end of the reporting period which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilised. Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised. Deferred income tax is provided on post acquisition retained earnings and other post acquisition movements in reserves of subsidiaries, except where the Bank controls the subsidiary’s dividend policy and it is probable that the difference will not reverse through dividends or otherwise in the foreseeable future. 11
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 3
Summary of Significant Accounting Policies (Continued)
Uncertain tax positions. The Bank's uncertain tax positions are reassessed by management at the end of each reporting period. Liabilities are recorded for income tax positions that are determined by management as more likely than not to result in additional taxes being levied if the positions were to be challenged by the tax authorities. The assessment is based on the interpretation of tax laws that have been enacted or substantively enacted by the end of the reporting period and any known court or other rulings on such issues. Liabilities for penalties, interest and taxes other than on income are recognised based on management’s best estimate of the expenditure required to settle the obligations at the end of the reporting period. Trade and other payables. Trade payables are accrued when the counterparty has performed its obligations under the contract and are carried at amortised cost. Share capital. Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Any excess of the fair value of consideration received over the par value of shares issued is recorded as share premium in equity. Income and expense recognition. Interest income and expense are recorded for all debt instruments on an accrual basis using the effective interest method. This method defers, as part of interest income or expense, all fees paid or received between the parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Fees integral to the effective interest rate include origination fees received or paid by the entity relating to the creation or acquisition of a financial asset or issuance of a financial liability, for example fees for evaluating creditworthiness, evaluating and recording guarantees or collateral, negotiating the terms of the instrument and for processing transaction documents. Commitment fees received by the Bank to originate loans at market interest rates are integral to the effective interest rate if it is probable that the Bank will enter into a specific lending arrangement and does not expect to sell the resulting loan shortly after origination. The Bank does not designate loan commitments as financial liabilities at fair value through profit or loss. When loans and other debt instruments become doubtful of collection, they are written down to the present value of expected cash inflows and interest income is thereafter recorded for the unwinding of the present value discount based on the asset’s effective interest rate which was used to measure the impairment loss. All other fees, commissions and other income and expense items are generally recorded on an accrual basis by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. Loan syndication fees are recognised as income when the syndication has been completed and the Bank retains no part of the loan package for itself or retains a part at the same effective interest rate as for the other participants. Commissions and fees arising from negotiating, or participating in the negotiation of a transaction for a third party, such as the acquisition of loans, shares or other securities or the purchase or sale of businesses, and which are earned on execution of the underlying transaction, are recorded on its completion. Portfolio and other management advisory and service fees are recognised based on the applicable service contracts, usually on a time-proportion basis. Asset management fees related to investment funds are recorded rateably over the period the service is provided. The same principle is applied for wealth management, financial planning and custody services that are continually provided over an extended period of time. Foreign currency translation. The functional currency of the Bank is the currency of the primary economic environment in which the entity operates. The functional currency of the Bank is the national currency of the Russian Federation, Russian Roubles (“RR”). At 31 December 2009 the principal rate of exchange used for translating foreign currency balances was USD 1 = RR 30.2442 (2008: USD 1 = RR 29.3804), EUR 1 = RR 43.3883 (2008: USD 1 = RR 41.4411). Offsetting. Financial assets and liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts, and there is an intention to either settle on a net basis, or to realise the asset and settle the liability simultaneously. 12
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 3
Summary of Significant Accounting Policies (Continued)
Staff costs and related contributions. Wages, salaries, contributions to the Russian Federation state pension and social insurance funds, paid annual leave and sick leave, bonuses, and non-monetary benefits are accrued in the year in which the associated services are rendered by the employees of the Bank. Share-based compensation. Some transactions are 'share-based', even though they do not involve the issue of shares, share options or any other form of equity instrument of the Bank. Share appreciation rights settled in cash are transactions in which the amount of cash paid to the employee is based upon the increase in the Parent bank’s share price over a specified period, usually subject to vesting conditions, such as the employee's remaining with the Bank during the specified period. Certain employees of the Bank are entitled to cash settled share-based compensation. The cost of employee services received in exchange for a share-based award is measured based on the grant-date fair value of the award. Share-based awards which require future service before vesting are recognised as an expense over the respective service period. The share-based awards are settled in cash. The share-based awards which will be settled in cash, is based on the value of the Parent bank's shares subject to certain conditions being met such as period of an employee’s service with the Bank and financial performance of the Bank. Accrued share-based compensation is recorded in liabilities. Segment reporting. Operating segments are reported in a manner consistent with the internal reporting provided to the Bank’s chief operating decision maker. Segments whose revenue, result or assets are ten percent or more of all the segments are reported separately. Opening statement of financial position at the beginning of the earliest comparative period presented and related information in the notes. The revised IAS 1 which became effective from 1 January 2009 requires an entity to present a statement of financial position as at the beginning of the earliest comparative period (‘opening statement of financial position’), when the entity applies an accounting policy retrospectively or makes a retrospective restatement or when it reclassifies items in its financial statements. Therefore, an entity that makes such a prior period adjustment or reclassification normally presents, as a minimum, three statements of financial position, two of each of the other statements, and related notes. In 2009, the Bank made restatements required by the amended IAS 1 that do not impact the statement of financial position. IAS 1 suggests that the opening statement of financial position should be presented even if the restatements have an impact only on the other primary statements. In these circumstances, management considered whether omitting the opening statement of financial position at 1 January 2008 would represent a material omission of information. In management’s opinion, the omission of the opening statement of financial position, where the restatement or reclassification does not affect any statement of financial position (and that fact is disclosed), is not material. Management considered that materiality of an omission is measured against its ability to influence the economic decisions of the users of the financial statements. Presentation of each item of other comprehensive income in the statement of changes in equity. The revised IAS 1 which became effective from 1 January 2009 requires an entity to present for each component of equity, a reconciliation between the carrying amount at the beginning and the end of the period, separately disclosing each change. This could include presenting profit or loss and each item of other comprehensive income in the statement of changes in equity. Management considered materiality and concluded that it is sufficient for an entity to present such information only in the statement of comprehensive income and that repeating the same information in the statement of changes in equity, is not a material omission of information. In reaching this conclusion, Management considered the examples provided in the implementation guidance, which accompanies the revised IAS 1.
13
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 4
Critical Accounting Estimates, and Judgements in Applying Accounting Policies
The Bank makes estimates and assumptions that affect the amounts recognised in the financial statements and the carrying amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management also makes certain judgements, apart from those involving estimations, in the process of applying the accounting policies. Judgements that have the most significant effect on the amounts recognised in the financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year include: Impairment losses on loans and advances. The Bank regularly reviews its loan portfolios to assess impairment. In determining whether an impairment loss should be recorded in profit or loss for the year, the Bank makes judgements as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. A 10% increase or decrease in actual loss experience compared to the loss estimates used would result in an increase or decrease in loan impairment losses of RR 67 787 thousand (2008: RR 17 159 thousand), respectively. Impairment losses for loans individually determined to be impaired are based on estimates of discounted future cash flows of these loans, taking into account repayments and realisation of any assets held as collateral against the loans. A 10% increase or decrease in the actual loss experience compared to the estimated future discounted cash flows from loans individually determined to be impaired, which could arise from differences in amounts and timing of the cash flows, would result in an increase or decrease in loan impairment losses of RR 11 730 thousand (2008: RR 0 thousand), respectively. Fair value of derivatives. The fair values of financial derivatives that are not quoted in active markets are determined by using valuation techniques. The Bank uses discounted cash flow valuation techniques to determine the fair value of currency derivatives that are not traded in an active market. Where valuation techniques (for example, models) are used to determine fair values, they are validated and periodically reviewed by qualified personnel independent of the area that created them. All models are certified before they are used, and models are calibrated to ensure that outputs reflect actual data and comparative market prices. The total amount of the net change in fair value estimated using a valuation technique that was recognised in profit or loss for the year ended 31 December 2009 was loss of RR 165 820 thousand (31 December 2008: loss of RR 1 736 424 thousand). Refer to Note 27. To the extent practical, models use only observable data, however areas such as credit risk (both own and counterparty), volatilities and correlations require management to make estimates. Changes in assumptions about these factors could affect reported fair values. Changing the assumptions not supported by observable market data to a reasonably possible alternative would not result in a significantly different profit, income, total assets or total liabilities. Tax legislation. Russian tax, currency and customs legislation is subject to varying interpretations. Refer to Note 26. Initial recognition of related party transactions. In the normal course of business the Bank enters into transactions with its related parties. IAS 39 requires initial recognition of financial instruments based on their fair values. Judgement is applied in determining if transactions are priced at market or non-market interest rates, where there is no active market for such transactions. The basis for judgement is pricing for similar types of transactions with unrelated parties and effective interest rate analysis. Terms and conditions of related party balances are disclosed in Note 30.
14
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 5
Adoption of New or Revised Standards and Interpretations
Certain new standards and interpretations became effective for the Bank from 1 January 2009: IFRS 8, Operating Segments. The standard applies to entities whose debt or equity instruments are traded in a public market or that file, or are in the process of filing, their financial statements with a regulatory organisation for the purpose of issuing any class of instruments in a public market. IFRS 8 requires an entity to report financial and descriptive information about its operating segments, with segment information presented on a similar basis to that used for internal reporting purposes. Although IFRS 8 does not currently apply to the Bank, the Bank has early adopted that standard from 1 January 2009, in anticipation of a planned issue of certain debt instruments. The adoption of IFRS 8 has resulted in split of segments into: Corporate and Investment banking, Retail banking. IAS 23, Borrowing Costs, revised in March 2007. The main change is the removal of the option of immediately recognising as an expense borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale. Borrowing costs that are directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale (a qualifying asset) form part of the cost of that asset, if the commencement date for capitalisation is on or after 1 January 2009. Other borrowing costs are recognised as an expense using the effective interest method. IAS 1, Presentation of Financial Statements, revised in September 2007. The main change in IAS 1 is the replacement of the income statement by a statement of comprehensive income which includes all non-owner changes in equity, such as the revaluation of available-for-sale financial assets. Alternatively, entities are allowed to present two statements: a separate income statement and a statement of comprehensive income. The Bank has elected to present a single statement of comprehensive income. The revised IAS 1 also introduces a requirement to present a statement of financial position (balance sheet) at the beginning of the earliest comparative period whenever the entity restates comparatives due to reclassifications, changes in accounting policies, or corrections of errors. The revised IAS 1 had an impact on the presentation of the Bank’s financial statements but had no impact on the recognition or measurement of specific transactions and balances. Improvements to International Financial Reporting Standards (issued in May 2008). In 2008, the International Accounting Standards Board decided to initiate an annual improvements project as a method of making necessary, but non-urgent, amendments to IFRS. The amendments consist of a mixture of substantive changes, clarifications, and changes in terminology in various standards. The substantive changes relate to the following areas: classification as held for sale under IFRS 5 in case of a loss of control over a subsidiary; possibility of presentation of financial instruments held for trading as non-current under IAS 1; accounting for sale of IAS 16 assets which were previously held for rental and classification of the related cash flows under IAS 7 as cash flows from operating activities; clarification of definition of a curtailment under IAS 19; accounting for below market interest rate government loans in accordance with IAS 20; making the definition of borrowing costs in IAS 23 consistent with the effective interest method; clarification of accounting for subsidiaries held for sale under IAS 27 and IFRS 5; reduction in the disclosure requirements relating to associates and joint ventures under IAS 28 and IAS 31; enhancement of disclosures required by IAS 36; clarification of accounting for advertising costs under IAS 38; amending the definition of the fair value through profit or loss category to be consistent with hedge accounting under IAS 39; introduction of accounting for investment properties under construction in accordance with IAS 40; and reduction in restrictions over manner of determining fair value of biological assets under IAS 41. Further amendments made to IAS 8, 10, 18, 20, 29, 34, 40, 41 and to IFRS 7 represent terminology or editorial changes only, which the IASB believes have no or minimal effect on accounting. Puttable Financial Instruments and Obligations Arising on Liquidation—IAS 32 and IAS 1 Amendment. The amendment requires classification as equity of some financial instruments that meet the definition of financial liabilities. The amendment did not have an impact on these financial statements. Vesting Conditions and Cancellations—Amendment to IFRS 2, Share-based Payment. The amendment clarified that only service conditions and performance conditions are vesting conditions. Other features of a share-based payment are not vesting conditions. The amendment specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The amendment did not have an impact on these financial statements.
15
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 5
Adoption of New or Revised Standards and Interpretations (Continued)
IFRIC 13, Customer Loyalty Programmes. IFRIC 13 clarifies that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement using fair values. The amendment did not have an impact on these financial statements. IFRIC 15, Agreements for the Construction of Real Estate. The interpretation applies to the accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors, and provides guidance for determining whether agreements for the construction of real estate are within the scope of IAS 11 or IAS 18. It also provides criteria for determining when entities should recognise revenue on such transactions. The amendment did not have any material impact on these financial statements. Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate—IFRS 1 and IAS 27 Amendment, issued in May 2008. The amendment allows first-time adopters of IFRS to measure investments in subsidiaries, jointly controlled entities or associates at fair value or at previous GAAP carrying value as deemed cost in the separate financial statements. The amendment also requires distributions from pre-acquisition net assets of investees to be recognised in profit or loss for the year rather than as a recovery of the investment. The amendment did not have an impact on these financial statements. Improving Disclosures about Financial Instruments - Amendment to IFRS 7, Financial Instruments: Disclosures, issued in March 2009. The amendment requires enhanced disclosures about fair value measurements and liquidity risk. The entity is required to disclose an analysis of financial instruments using a three-level fair value measurement hierarchy. The amendment (a) clarifies that the maturity analysis of liabilities should include issued financial guarantee contracts at the maximum amount of the guarantee in the earliest period in which the guarantee could be called; and (b) requires disclosure of remaining contractual maturities of financial derivatives if the contractual maturities are essential for an understanding of the timing of the cash flows. An entity will further have to disclose a maturity analysis of financial assets it holds for managing liquidity risk, if that information is necessary to enable users of its financial statements to evaluate the nature and extent of liquidity risk. The enhanced disclosures are included in these financial statements. Embedded Derivatives - Amendments to IFRIC 9 and IAS 39, issued in March 2009. The amendments clarify that on reclassification of a financial asset out of the ‘at fair value through profit or loss’ category, all embedded derivatives have to be assessed and, if necessary, separately accounted for. The amendment did not have an impact on these financial statements. IFRIC 16, Hedges of a Net Investment in a Foreign Operation. The interpretation explains which currency risk exposures are eligible for hedge accounting and states that translation from the functional currency to the presentation currency does not create an exposure to which hedge accounting could be applied. The IFRIC allows the hedging instrument to be held by any entity or entities within a group except the foreign operation that itself is being hedged. The interpretation also clarifies how the currency translation gain or loss reclassified from other comprehensive income to profit or loss is calculated on disposal of the hedged foreign operation. Reporting entities apply IAS 39 to discontinue hedge accounting prospectively when their hedges do not meet the criteria for hedge accounting in IFRIC 16. IFRIC 16 did not have an impact on these financial statements. Unless otherwise stated above, the amendments and interpretations did not have any significant effect on the Bank’s financial statements.
16
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 6
New Accounting Pronouncements
Certain new standards and interpretations have been published that are mandatory for the Bank’s accounting periods beginning on or after 1 January 2010 or later periods and which the Bank has not early adopted: Improvements to International Financial Reporting Standards (issued in May 2010 and effective for the Bank from 1 January 2011). The improvements consist of a mixture of substantive changes and clarifications in the following standards and interpretations: IFRS 1 was amended (i) to allow previous GAAP carrying value to be used as deemed cost of an item of property, plant and equipment or an intangible asset if that item was used in operations subject to rate regulation, (ii) to allow an event driven revaluation to be used as deemed cost of property, plant and equipment even if the revaluation occurs during a period covered by the first IFRS financial statements and (iii) to require a first-time adopter to explain changes in accounting policies or in the IFRS 1 exemptions between its first IFRS interim report and its first IFRS financial statements; IFRS 3 was amended (i) to require measurement at fair value (unless another measurement basis is required by other IFRS standards) of non-controlling interests that are not present ownership interest or do not entitle the holder to a proportionate share of net assets in the event of liquidation, (ii) to provide guidance to un-replaced and voluntarily replaced share-based payments and (iii) to clarify that the contingent considerations from business combinations that occurred before the effective date of revised IFRS 3 (issued in January 2008) will be accounted for in accordance with the guidance in the previous version of IFRS 3; IFRS 7 was amended to clarify certain disclosure requirements, in particular (i) by adding an explicit emphasis on the interaction between qualitative and quantitative disclosures about the nature and extent of financial risks, (ii) by removing the requirement to disclose carrying amount of renegotiated financial assets that would otherwise be past due or impaired, (iii) by replacing the requirement to disclose fair value of collateral by a more general requirement to disclose its financial effect, and (iv) by clarifying that an entity should disclose the amount of foreclosed collateral held at the reporting date and not the amount obtained during the reporting period; IAS 1 was amended to clarify that the components of the statement of changes in equity include profit or loss, other comprehensive income, total comprehensive income and transactions with owners and that an analysis of other comprehensive income by item may be presented in the notes; IAS 27 was amended by clarifying the transition rules for amendments to IAS 21, 28 and 31 made by the revised IAS 27 (as amended in January 2008); IAS 34 was amended to add additional examples of significant events and transactions requiring disclosure in a condensed interim financial report, including transfers between the levels of fair value hierarchy, changes in classification of financial assets or changes in business or economic environment that affect the fair values of the entity’s financial instruments; and IFRIC 13 was amended to clarify measurement of fair value of award credits. IFRIC 17, Distributions of Non-Cash Assets to Owners (effective for annual periods beginning on or after 1 July 2009). The interpretation clarifies when and how distribution of non-cash assets as dividends to the owners should be recognised. An entity should measure a liability to distribute non-cash assets as a dividend to its owners at the fair value of the assets to be distributed. A gain or loss on disposal of the distributed non-cash assets will be recognised in profit or loss for the year when the entity settles the dividend payable. IFRIC 17 is not relevant to the Bank’s operations because it does not distribute noncash assets to owners. IFRIC 18, Transfers of Assets from Customers (effective for annual periods beginning on or after 1 July 2009). The interpretation clarifies the accounting for transfers of assets from customers, namely, the circumstances in which the definition of an asset is met; the recognition of the asset and the measurement of its cost on initial recognition; the identification of the separately identifiable services (one or more services in exchange for the transferred asset); the recognition of revenue, and the accounting for transfers of cash from customers. IFRIC 18 is not expected to have any impact on the Bank’s financial statements. Classification of Rights Issues - Amendment to IAS 32 (issued 8 October 2009; effective for annual periods beginning on or after 1 February 2010). The amendment exempts certain rights issues of shares with proceeds denominated in foreign currencies from classification as financial derivatives.
17
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 6
New Accounting Pronouncements (Continued)
IAS 27, Consolidated and Separate Financial Statements (revised January 2008; effective for annual periods beginning on or after 1 July 2009). The revised IAS 27 will require an entity to attribute total comprehensive income to the owners of the parent and to the non-controlling interests (previously “minority interests”) even if this results in the non-controlling interests having a deficit balance (the current standard requires the excess losses to be allocated to the owners of the parent in most cases). The revised standard specifies that changes in a parent’s ownership interest in a subsidiary that do not result in the loss of control must be accounted for as equity transactions. It also specifies how an entity should measure any gain or loss arising on the loss of control of a subsidiary. At the date when control is lost, any investment retained in the former subsidiary will have to be measured at its fair value. The Bank does not expect the amended standard to have a material effect on its financial statements. IFRS 3, Business Combinations (revised January 2008; effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009). The revised IFRS 3 will allow entities to choose to measure non-controlling interests using the existing IFRS 3 method (proportionate share of the acquiree’s identifiable net assets) or at fair value. The revised IFRS 3 is more detailed in providing guidance on the application of the purchase method to business combinations. The requirement to measure at fair value every asset and liability at each step in a step acquisition for the purposes of calculating a portion of goodwill has been removed. Instead, in a business combination achieved in stages, the acquirer will have to remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognise the resulting gain or loss, if any, in profit or loss for the year. Acquisition-related costs will be accounted for separately from the business combination and therefore recognised as expenses rather than included in goodwill. An acquirer will have to recognise at the acquisition date a liability for any contingent purchase consideration. Changes in the value of that liability after the acquisition date will be recognised in accordance with other applicable IFRSs, as appropriate, rather than by adjusting goodwill. The revised IFRS 3 brings into its scope business combinations involving only mutual entities and business combinations achieved by contract alone. IFRS 3 is not relevant to the Bank as it does not expect a business combination to occur. Eligible Hedged Items—Amendment to IAS 39, Financial Instruments: Recognition and Measurement (effective with retrospective application for annual periods beginning on or after 1 July 2009). The amendment clarifies how the principles that determine whether a hedged risk or portion of cash flows is eligible for designation should be applied in particular situations. The Bank is currently assessing the impact of the amendment on its financial statements. IFRS 1, First-time Adoption of International Financial Reporting Standards (following an amendment in December 2008, effective for the first IFRS financial statements for a period beginning on or after 1 July 2009). The revised IFRS 1 retains the substance of its previous version but within a changed structure in order to make it easier for the reader to understand and to better accommodate future changes. The Bank concluded that the revised standard does not have any effect on its financial statements. Bank Cash-settled Share-based Payment Transactions - Amendments to IFRS 2, Share-based Payment (effective for annual periods beginning on or after 1 January 2010). The amendments provide a clear basis to determine the classification of share-based payment awards in both consolidated and separate financial statements. The amendments incorporate into the standard the guidance in IFRIC 8 and IFRIC 11, which are withdrawn. The amendments expand on the guidance given in IFRIC 11 to address plans that were previously not considered in the interpretation. The amendments also clarify the defined terms in the Appendix to the standard. The Bank is currently assessing the impact of the amendment on its financial statements. Additional Exemptions for First-time Adopters - Amendments to IFRS 1, First-time Adoption of IFRS (effective for annual periods beginning on or after 1 January 2010). The amendments exempt entities using the full cost method from retrospective application of IFRSs for oil and gas assets and also exempt entities with existing leasing contracts from reassessing the classification of those contracts in accordance with IFRIC 4, 'Determining Whether an Arrangement Contains a Lease' when the application of their national accounting requirements produced the same result. The amendments will not have any impact on the Bank’s financial statements.
18
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 6
New Accounting Pronouncements (Continued)
Improvements to International Financial Reporting Standards (issued in April 2009; amendments to IFRS 2, IAS 38, IFRIC 9 and IFRIC 16 are effective for annual periods beginning on or after 1 July 2009; amendments to IFRS 5, IFRS 8, IAS 1, IAS 7, IAS 17, IAS 36 and IAS 39 are effective for annual periods beginning on or after 1 January 2010). The improvements consist of a mixture of substantive changes and clarifications in the following standards and interpretations: clarification that contributions of businesses in common control transactions and formation of joint ventures are not within the scope of IFRS 2; clarification of disclosure requirements set by IFRS 5 and other standards for noncurrent assets (or disposal groups) classified as held for sale or discontinued operations; requiring to report a measure of total assets and liabilities for each reportable segment under IFRS 8 only if such amounts are regularly provided to the chief operating decision maker; amending IAS 1 to allow classification of certain liabilities settled by entity’s own equity instruments as non-current; changing IAS 7 such that only expenditures that result in a recognised asset are eligible for classification as investing activities; allowing classification of certain long-term land leases as finance leases under IAS 17 even without transfer of ownership of the land at the end of the lease; providing additional guidance in IAS 18 for determining whether an entity acts as a principal or an agent; clarification in IAS 36 that a cash generating unit shall not be larger than an operating segment before aggregation; supplementing IAS 38 regarding measurement of fair value of intangible assets acquired in a business combination; amending IAS 39 (i) to include in its scope option contracts that could result in business combinations, (ii) to clarify the period of reclassifying gains or losses on cash flow hedging instruments from equity to profit or loss for the year and (iii) to state that a prepayment option is closely related to the host contract if upon exercise the borrower reimburses economic loss of the lender; amending IFRIC 9 to state that embedded derivatives in contracts acquired in common control transactions and formation of joint ventures are not within its scope; and removing the restriction in IFRIC 16 that hedging instruments may not be held by the foreign operation that itself is being hedged. The Bank does not expect the amendments to have any material effect on its financial statements. Amendment to IAS 24, Related Party Disclosures (issued in November 2009 and effective for annual periods beginning on or after 1 January 2011). IAS 24 was revised in 2009 by: (a) simplifying the definition of a related party, clarifying its intended meaning and eliminating inconsistencies; and by (b) providing a partial exemption from the disclosure requirements for government-related entities. IFRS 9, Financial Instruments Part 1: Classification and Measurement. IFRS 9 was issued in November 2009 and replaces those parts of IAS 39 relating to the classification and measurement of financial assets. Key features are as follows:
Financial assets are required to be classified into two measurement categories: those to be measured subsequently at fair value, and those to be measured subsequently at amortised cost. The decision is to be made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument;
An instrument is subsequently measured at amortised cost only if it is a debt instrument and both (i) the objective of the entity’s business model is to hold the asset to collect the contractual cash flows, and (ii) the asset’s contractual cash flows represent only payments of principal and interest (that is, it has only “basic loan features”). All other debt instruments are to be measured at fair value through profit or loss;
All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for trading will be measured at fair value through profit or loss. For all other equity investments, an irrevocable election can be made at initial recognition, to recognise unrealised and realised fair value gains and losses through other comprehensive income rather than profit or loss. There is to be no recycling of fair value gains and losses to profit or loss. This election may be made on an instrument-by-instrument basis. Dividends are to be presented in profit or loss, as long as they represent a return on investment;
While adoption of IFRS 9 is mandatory from 1 January 2013, earlier adoption is permitted.
The Bank is considering the implications of the standard, the impact on the financial position of the Bank and the timing of its adoption by the Bank.
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BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 6
New Accounting Pronouncements (Continued)
IFRIC 19, Extinguishing Financial Liabilities with Equity Instruments (effective for annual periods beginning on or after 1 July 2010). This IFRIC clarifies the accounting when an entity renegotiates the terms of its debt with the result that the liability is extinguished through the debtor issuing its own equity instruments to the creditor. A gain or loss is recognised in the profit and loss account based on the fair value of the equity instruments compared to the carrying amount of the debt. The Bank is currently assessing the impact of the interpretation on its financial statements. Prepayments of a Minimum Funding Requirement – Amendment to IFRIC 14 (effective for annual periods beginning on or after 1 January 2011). This amendment will have a limited impact as it applies only to companies that are required to make minimum funding contributions to a defined benefit pension plan. It removes an unintended consequence of IFRIC 14 related to voluntary pension prepayments when there is a minimum funding requirement. The Bank does not expect the amendments to have any material effect on its financial statements. Limited exemption from comparative IFRS 7 disclosures for first-time adopters - Amendment to IFRS 1 (effective for annual periods beginning on or after 1 July 2010). Existing IFRS preparers were granted relief from presenting comparative information for the new disclosures required by the March 2009 amendments to IFRS 7 'Financial Instruments: Disclosures'. This amendment to IFRS 1 provides first-time adopters with the same transition provisions as included in the amendment to IFRS 7. The amendment is not expected to have any impact on the Bank's financial statements. Unless otherwise described above, the new standards and interpretations are not expected to significantly affect the Bank’s financial statements. 7
Cash and Cash Equivalents
In thousands of Russian Roubles
2009
2008
Cash on hand Cash balances with the CBRF (other than mandatory reserve deposits) Correspondent accounts and overnight placements with other banks - Russian Federation - Other countries Placements with other banks with original maturities of less than three months
4 215 1 772 259
7 029 977 510
641 906 101 176 5 360 982
302 840 374 545 15 917 582
Total cash and cash equivalents
7 880 538
17 579 506
The credit quality of cash and cash equivalents balances as follows at 31 December 2009 is at follows: Cash in hand In thousands of Russian Roubles
Neither past due nor impaired Cash on hand Cash balance with the CBRF AA- to AA+ rated A- to A+ rated BBB+ to BBB- rated BB rated B+ rated Subsidiary of the Parent bank unrated Trading systems Other
Cash Corresponbalances with dent accounts the CBRF and overnight placements
Placements with other banks
Total
4 215 -
1 772 259 -
101 176 4 567 -
800 175 1 890 564 1 000 233 1 258 237 200 047 211 726
4 215 2 572 434 1 991 740 1 000 233 1 262 804 200 047 211 726
-
-
9 039 627 897 403
-
9 039 627 897 403
Total neither past due nor impaired
4 215
1 772 259
743 082
5 360 982
7 880 538
Total cash and cash equivalents
4 215
1 772 259
743 082
5 360 982
7 880 538 20
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 7
Cash and Cash Equivalents (Continued)
The credit quality of cash and cash equivalents balances at 31 December 2008 is as follows:
In thousands of Russian Roubles
Neither past due nor impaired Cash on hand Cash balance with the CBRF AA- to AA+ rated A- to A+ rated BBB+ to BBB- rated B+ rated Subsidiary of the Parent bank unrated Trading systems Other
Cash in hand Cash balances Corresponwith the CBRF dent accounts and overnight placements
Placements with other banks
Total
7 029 -
977 510 -
374 545 6 607 -
14 914 816 350 192 200 074
7 029 977 510 15 289 361 350 192 6 607 200 074
-
-
321 294 781 1 131
452 500 -
452 821 294 781 1 131
Total neither past due nor impaired
7 029
977 510
677 385
15 917 582
17 579 506
Total cash and cash equivalents
7 029
977 510
677 385
15 917 582
17 579 506
The credit quality of cash and cash equivalents balances is based on Standard and Poor’s ratings, ratings of Moody’s or Fitch, which are converted to the nearest equivalent on the Standard and Poor’s ratings. At 31 December 2009 the estimated fair value of cash and cash equivalents was RR 7 880 538 thousand (2008: RR 17 579 506 thousand). Refer to Note 28. Maturity and interest rate analyses of cash and cash equivalents are disclosed in Note 24. Information on related party balances is disclosed in Note 30.
21
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 8
Due from Other Banks
In thousands of Russian Roubles Short-term placements with other banks with original maturities from three months to one year Long-term placements with other banks with original maturities of more than one year Less: Provision for impairment Total due from other banks
2009
2008
1 798 266
736 230
606 148 (117 297) 2 287 117
1 940 006 2 676 236
Amounts due from other banks are not collateralised. Analysis by credit quality of amounts due from other banks outstanding at 31 December 2009 is as follows:
In thousands of Russian Roubles Neither past due nor impaired - AA- to AA+ rated - BBB- rated - Subsidiary of the Parent bank unrated
Short-term Long-term placements with placements with other banks other banks
Total
756 572 909 657 -
606 148
756 572 909 657 606 148
1 666 229
606 148
2 272 377
Balances individually determined to be impaired (gross) - 181 to 360 days overdue
132 037
-
132 037
Total individually impaired (gross)
132 037
-
132 037
(117 297)
-
(117 297)
Total neither past due nor impaired
Less provision for impairment Total due from other banks
1 680 969
606 148
2 287 117
Analysis by credit quality of amounts due from other banks outstanding at 31 December 2008 is as follows:
In thousands of Russian Roubles
Short-term Long-term placements with placements with other banks other banks
Total
Neither past due nor impaired - AA- to AA+ rated - BBB- rated - BB rated - Subsidiary of the Parent bank unrated
209 705 259 455 267 070
879 312 445 216 615 478
209 705 879 312 704 671 882 548
Total neither past due nor impaired
736 230
1 940 006
2 676 236
Total due from other banks
736 230
1 940 006
2 676 236
The credit quality of amounts due from other banks is based on Standard and Poor’s ratings, ratings of Moody’s or Fitch, which are converted to the nearest equivalent on the Standard and Poor’s ratings.
22
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 8
Due from Other Banks (Continued)
The primary factor that the Bank considers in determining whether a deposit is impaired is its overdue status. Movements in the provision for impairment of due from other banks are as follows: In thousands of Russian Roubles
2009
Provision for impairment at 1 January Provision for impairment during the year
117 297
Provision for impairment at 31 December
117 297
At 31 December 2009 the Bank had balances with 3 counterparty banks (2008: 5 banks) for total amount of RR 2 271 719 thousand (2008: RR 2 676 236 thousand) or 99% of the total amount due from other banks (2008: 100%). Refer to Note 28 for the estimated fair value of amounts due from other banks. Maturity and interest rate analyses of cash and cash equivalents are disclosed in Note 24. Information on related party balances is disclosed in Note 30. 9
Loans and Advances to Customers
In thousands of Russian Roubles
2009
2008
Corporate loans Loans to individuals - consumer loans
19 334 551 2 272 947
42 996 439 986 987
Total loans and advances to customers (before impairment)
21 607 498
43 983 426
Less: Provision for loan impairment
(635 945)
Total loans and advances to customers
(245 795)
20 971 553
43 737 631
Corporate loans Consumer loans
Total
Movements in the provision for loan impairment during 2009 are as follows: In thousands of Russian Roubles Provision for loan impairment at 1 January 2009 Provision for loan impairment during the year Provision on disposed loans
173 680 304 692 -
72 115 142 372 (56 914)
245 795 447 064 (56 914)
Provision for loan impairment at 31 December 2009
478 372
157 573
635 945
The provision for loan impairment during 2009 differs from the amount presented in the statement of comprehensive income due to sale of impaired loans to a third party with a nominal value of RR 56 914 thousand for which provision of RR 56 914 thousand was recognised. Movements in the provision for loan impairment during 2008 are as follows: In thousands of Russian Roubles
Corporate loans Consumer loans
Total
Provision for loan impairment at 1 January 2008 Provision for loan impairment during the year
62 004 111 676
4 144 67 971
66 148 179 647
Provision for loan impairment at 31 December 2008
173 680
72 115
245 795
23
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 9
Loans and Advances to Customers (Continued)
Economic sector risk concentrations within the customer loan portfolio are as follows: In thousands of Russian Roubles Mining Trade Manufacturing Individuals Oil and gas Energy Finance Chemical industry Transport Telecommunications Pulp industry Other Total loans and advances to customers (before impairment)
2009 Amount
%
2008 Amount
%
4 962 938 4 867 719 4 502 255 2 272 947 1 577 271 1 072 684 870 201 864 082 332 739 213 208 71 454
23 23 21 10 7 5 4 4 2 1 -
7 140 760 4 691 362 15 211 693 986 987 8 900 068 1 611 069 912 055 1 073 044 357 189 323 993 2 202 340 572 866
16 11 35 2 20 4 2 2 1 1 5 1
21 607 498
100
43 983 426
100
Information about loan portfolio by types of collateral at 31 December 2009 is as follows: In thousands of Russian Roubles Loans guaranteed by the Parent bank Loans guaranteed by third parties Loans collateralised by: - goods in turnover - cars - other assets Unsecured loans Total loans and advances to customers
Corporate loans
Consumer loans
Total
7 334 162 7 730 143
-
7 334 162 7 730 143
328 748 109 906 3 831 592
374 732 1 898 215
328 748 374 732 109 906 5 729 807
19 334 551
2 272 947
21 607 498
Information about loan portfolio by types of collateral at 31 December 2008 is as follows: Corporate loans
Consumer loans
Total
Loans guaranteed by the Parent bank Loans guaranteed by third parties Loans collateralised by: - goods in turnover - equipment - cars - other assets Unsecured loans
30 116 654 7 305 119
-
30 116 654 7 305 119
520 494 60 862 826 895 4 166 415
30 098 956 889
520 494 60 862 30 098 826 895 5 123 304
Total loans and advances to customers
42 996 439
986 987
43 983 426
In thousands of Russian Roubles
The disclosure above represents the lower of the carrying value of the loan or collateral taken; the remaining part is disclosed within the unsecured exposures. The carrying value of loans was allocated based on liquidity of the assets taken as collateral.
24
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 9
Loans and Advances to Customers (Continued)
Analysis by credit quality of loans outstanding at 31 December 2009 and 31 December 2008 is as follows: In thousands of Russian Roubles
Corporate loans
2009 Consumer loans
Total
Corporate loans
2008 Consumer loans
Total
Current and not impaired Internal rating 4Internal rating 4 Internal rating 5Internal rating 5 Internal rating 5+ Internal rating 6Internal rating 6 Internal rating 6+ Internal rating 7Internal rating 7 Internal rating 7+ Internal rating 8Internal rating 8 Internal rating 8+ Internal rating 10Unrated
502 521 1 110 602 1 922 993 489 231 5 152 361 1 354 207 1 811 629 564 672 1 045 259 832 318 1 898 130 1 826 130 749 116 -
2 057 222
502 521 1 110 602 1 922 993 489 231 5 152 361 1 354 207 1 811 629 564 672 1 045 259 832 318 1 898 130 1 826 130 749 116 2 057 222
749 079 1 793 780 8 590 406 2 783 799 4 717 017 2 488 810 9 595 224 2 274 845 3 292 554 4 451 059 743 711 1 041 032 16 888 -
884 024
749 079 1 793 780 8 590 406 2 783 799 4 717 017 2 488 810 9 595 224 2 274 845 3 292 554 4 451 059 743 711 1 041 032 16 888 884 024
19 259 169
2 057 222
21 316 391
42 538 204
884 024
43 422 228
Past due but not impaired - less than 30 days overdue - 30 to 90 days overdue
-
53 406 30 912
53 406 30 912
378 093 5 933
41 935 27 699
420 028 33 632
Total past due but not impaired
-
84 318
84 318
384 026
69 634
453 660
Impaired loans (gross) - 90 to 180 days overdue - 180 to 360 days overdue - over 360 days overdue
75 382
29 196 71 314 30 897
29 196 71 314 106 279
74 209
21 379 11 087 863
21 379 11 087 75 072
Total impaired loans (gross)
75 382
131 407
206 789
74 209
33 329
107 538
19 334 551
2 272 947
21 607 498
42 996 439
986 987
43 983 426
Total current and not impaired
Gross carrying value of other loans Less impairment provisions Total loans and advances to customers
(478 372)
18 856 179
(157 573)
2 115 374
(635 945)
20 971 553
(173 680)
42 822 759
(72 115)
914 872
(245 795)
43 737 631
The Bank does not assess credit quality of consumer loans based on rating system but analyses consumers through scoring system and by overdue status of these loans.
25
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 9
Loans and Advances to Customers (Continued)
Analysis by credit quality of consumer loans made based on scoring system at 31 December 2009 and 31 December 2008 is as follows: In thousands of Russian Roubles
2009
2008
Good credit standing Average credit standing Bad credit standing
1 045 733 739 430 272 059
488 863 283 693 111 468
Total current and not impaired consumer loans
2 057 222
884 024
The above ratings represent aggregated results of the scoring system used by the Bank at the moment of loan inspection. Good credit standing group represents excellent quality loans with the best score, average credit standing group – medium quality with average score and bad credit standing group – loans potentially under surveillance. The Bank applied the portfolio provisioning methodology prescribed by IAS 39, Financial Instruments: Recognition and Measurement, and created portfolio provisions for impairment losses that were incurred but have not been specifically identified with any individual loan by the end of the reporting period. The policy of the Bank is to classify each loan as ‘neither past due nor impaired’ until specific objective evidence of impairment of the loan is identified. The impairment provisions may exceed the total gross amount of individually impaired loans as a result of this policy and the portfolio impairment methodology. The primary factors that the Bank considers in determining whether a loan is impaired are its overdue status and realisability of related collateral, if any. As a result, the Bank presents above an ageing analysis of loans that are individually determined to be impaired. The portfolio impairment provision for corporate loans to counterparties with internal rating from 8- to 10+ is estimated at the Parent bank’s level. Main factors used in provision level determination are exposure at default, loss given default and probability of default. The fair value of collateral in respect of loans past due but not impaired and in respect of loans individually determined to be impaired at 31 December 2009 was as follows: Corporate loans
Consumer loans
Total
Fair value of collateral - loans past due but not impaired - cars
-
4 271
4 271
Fair value of collateral - individually impaired loans - cars
-
1 582
1 582
Total loans and advances to customers
-
5 853
5 853
In thousands of Russian Roubles
At 31 December 2008 loans past due but not impaired and loans individually determined to be impaired were not collateralized. Loans and advances to customers include three loans in the total amount of RR 1 922 993 thousand (2008: RR 2 778 097 thousand) which are hedged in respect of the interest rate risk. The negative fair value adjustment equals RR 210 753 thousand (2008: RR 58 094 thousand). Refer to Note 27. At 31 December 2009 the estimated fair value of loans and advances to customers was RR 20 971 553 thousand (2008: RR 43 737 631 thousand). Refer to Note 28. Maturity and interest rate analyses of cash and cash equivalents are disclosed in Note 24.
26
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 10
Investment Securities Available for Sale
In thousands of Russian Roubles
2009
2008
Federal loan bonds Municipal bonds
1 373 774 313 328
966 890 -
Total debt securities
1 687 102
966 890
Total investment securities available for sale
1 687 102
966 890
Analysis by credit quality of debt securities outstanding at 31 December 2009 is as follows: Russian government bonds
Municipal bonds
Total
Neither past due nor impaired BBB+ BBB
1 373 774 -
313 328
1 373 774 313 328
Total debt securities available for sale
1 373 774
313 328
1 687 102
In thousands of Russian Roubles
Analysis by credit quality of debt securities outstanding at 31 December 2008 is as follows: Russian government bonds
Total
Neither past due nor impaired A-
966 890
966 890
Total debt securities available for sale
966 890
966 890
In thousands of Russian Roubles
The credit quality of debt securities available for sale is based on Standard and Poor’s ratings, ratings of Moody’s or Fitch, which are converted to the nearest equivalent on the Standard and Poor’s ratings. The primary factor that the Bank considers in determining whether a debt security is impaired is its overdue status. OFZ are Russian Rouble denominated government securities issued by the Ministry of Finance of the Russian Federation. OFZ bonds have maturity dates from May 2010 to September 2012 (2008: from April 2009 to January 2011), coupon rate from 5.8% to 11.9% (2008: from 5.8% to 6.1%) and yield to maturity from 6.2% to 8.0% (2008: from 7.2% to 11.7%), depending on the type of bond issue. Municipal bonds are represented by debt securities denominated in Russian Roubles, issued by Moscow government and have coupon rates 8.0%, maturity date in September 2012 and yield to maturity 9.7%. The movements in investment securities available for sale are as follows: In thousands of Russian Roubles
2009
Carrying amount at 1 January Fair value gains less losses/(losses net of gains) Interest income accrued Interest income received Purchases Disposals of investment securities available for sale
966 890 74 483 91 398 (86 702) 1 277 042 (636 009)
Carrying amount at 31 December
1 687 102
2008 3 128 796 (86 667) 157 035 (167 557) 66 382 (2 131 099) 966 890
27
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 10
Investment Securities Available for Sale (Continued)
At 31 December 2009 the estimated fair value of investment securities available for sales was RR 1 687 102 thousand (2008: RR 966 890 thousand). Refer to Note 28. Investment securities available for sale include part of municipal bond in the total amount of RR 303 087 thousand (2008: nil) which are hedged in respect of the interest rate risk. The negative fair value adjustment equals RR 4 051 thousand (2008: nil). Maturity and interest rate analyses of investment securities available for sale are disclosed in Note 24. 11
Premises, Equipment and Intangible Assets Note
In thousands of Russian Roubles
Lease- Equipment hold and improve- computers ments
Vehicles
Other
Total premises and equipment
Intangible assets
Cost at 1 January 2008 Accumulated depreciation
61 080 (8 985)
68 454 (19 848)
8 961 (3 430)
25 100 (7 475)
163 595 (39 738)
16 390 (3 476)
Carrying amount at 1 January 2008
52 095
48 606
5 531
17 625
123 857
12 914
Additions Disposals Depreciation charge
204 (11 087) (16 945)
52 430 (336) (20 550)
3 659 (153) (3 488)
4 880 (10) (4 815)
61 173 (11 586) (45 798)
131 879 (16 811)
24 267
80 150
5 549
17 680
127 646
127 982
46 506 (22 239)
118 190 (38 040)
12 189 (6 640)
29 865 (12 185)
206 750 (79 104)
148 261 (20 279)
Carrying amount at 31 December 2008
24 267
80 150
5 549
17 680
127 646
127 982
Additions Disposals Depreciation charge
2 623 (1 380) (10 834)
10 850 (994) (30 678)
5 195 (641) (2 234)
3 051 (330) (5 877)
21 719 (3 345) (49 623)
48 570 (41 127)
14 676
59 328
7 869
14 524
96 397
135 425
47 749 (33 073)
126 218 (66 890)
16 561 (8 692)
31 972 (17 448)
222 500 (126 103)
196 831 (61 406)
14 676
59 328
7 869
14 524
96 397
135 425
21
Carrying amount at 31 December 2008 Cost at 31 December 2008 Accumulated depreciation
Carrying amount at 31 December 2009 Cost at 31 December 2009 Accumulated depreciation Carrying amount at 31 December 2009
21
Included in vehicles are assets held under finance leases with a carrying value of RR 5 132 thousand (2008: RR 4 789 thousand). Financial lease liability was disclosed within other financial liabilities. Please refer to Note 15.
28
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 12
Other Assets
In thousands of Russian Roubles
2009
2008
Other financial assets: Fee receivable from the Parent bank Other accruals
195 105 -
65 316 7 670
Total other financial assets
195 105
72 986
Other non-financial assets: Rent prepayments Prepayments for services Other
65 937 29 427 12 006
102 595 29 985 6 553
107 370
139 133
Total other non-financial assets
Fee receivable from the Parent bank represents fees to be received for provision of consulting services by the Bank. At 31 December 2009 the estimated fair value of other financial assets was RR 195 105 thousand (2008: RR 72 986 thousand). Refer to Note 28. Information on related party balances is disclosed in Note 30. Maturity analyses of other financial assets are disclosed in Note 24. 13
Due to Other Banks
In thousands of Russian Roubles
2009
2008
Correspondent accounts and overnight placements of other banks Term placements of other banks
18 739 15 251 553
744 612 41 748 505
Total due to other banks
15 270 292
42 493 117
Term placements of other banks are mainly provided by the Parent bank. Further information on related party balances is disclosed in Note 30. At 31 December 2009 the estimated fair value of due to other banks was RR 15 270 292 thousand (2008: RR 42 493 117 thousand). Refer to Note 28. Maturity and interest rate analyses of due to other banks are disclosed in Note 24. 14
Customer Accounts
In thousands of Russian Roubles
2009
2008
3 717 293 7 228 264
1 643 330 14 024 902
Individuals - Current/demand accounts
289 779
152 940
Total customer accounts
11 235 336
15 821 172
Legal entities - Current/settlement accounts - Term deposits
29
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 14
Customer Accounts (Continued)
Economic sector concentrations within customer accounts are as follows: In thousands of Russian Roubles Oil and gas Manufacturing Chemical industry Telecommunications Trade Individuals Energy Finance Transport Mining Other Total customer accounts
2009 Amount
%
2008 Amount
%
6 893 171 1 971 030 657 621 483 303 299 973 289 779 175 749 94 630 81 187 9 675 279 218
61 17 6 4 3 3 2 1 1 2
7 983 573 2 443 184 3 387 545 944 850 172 995 152 940 161 032 267 227 171 557 103 413 32 856
51 15 21 6 1 1 1 2 1 1 -
11 235 336
100
15 821 172
100
At 31 December 2009 included in term deposits of legal entities are deposits of RR 360 232 thousand (2008: RR 147 262 thousand) held as collateral for irrevocable commitments under letters of credit. Refer to Note 26. At 31 December 2009 the estimated fair value of customer accounts was RR 11 235 336 thousand (2008: RR 15 821 172 thousand). Refer to Note 28. Maturity and interest rate analysis of customer accounts is disclosed in Note 24. Information on related party balances is disclosed in Note 30. 15
Other Liabilities
In thousands of Russian Roubles
2009
2008
Other financial liabilities Finance lease liability
9 710
8 880
Total other financial liabilities
9 710
8 880
Other non-financial liabilities Accrued employee benefit costs Accrued IT expenses Taxes other than on income payable Other
391 216 21 056 42 746 5 263
223 925 20 828 20 312 6 333
Total other non-financial liabilities
460 281
271 398
Accrued IT expenses are maintenance fees for software used by back-office and front-office systems of Cetelem. The estimated amounts are based on number of applications received during the year, and on number of clients in the database. At 31 December 2009 the estimated fair value of other financial liabilities was RR 9 710 thousand (2008: RR 8 880 thousand). Refer to Note 28. Information on related party balances is disclosed in Note 30. Maturity analyses of other financial liabilities are disclosed in Note 24.
30
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 16
Subordinated Debt
In July 2007 the Bank received a subordinated loan from the Parent Bank of USD 10 000 thousand. The loan carries a variable interest rate of 3-month LIBOR plus 1% p.a. and matures at 12 July 2017. In February 2008 the Bank received a subordinated loan from the Parent Bank of USD 45 000 thousand. The loan carries a variable interest rate of 3-month LIBOR plus 1.5% p.a. and matures at 4 February 2013. As at 31 December 2009 subordinated debt equalled to RR 1 663 431 thousand and carried interest of 1.3% p.a. and 1.8% p.a. respectively (2008: RR 1 616 049 thousand, 2.5% p.a. and 3.0% p.a. respectively). In accordance with the terms of subordinated loan contracts, these loans rank last upon the Bank’s liquidation and may be settled only after the claims of all other lenders are met. Subordinated loans meet the criteria for “subordinated loans” stated by the CBRF and are included in the calculation of the Bank’s capital under the Russian legislation, particularly for the purposes of compliance with obligatory economic ratios. All subordinated loans are received from the Parent bank. At 31 December 2009 the estimated fair value of subordinated debt was RR 1 663 431 thousand (2008: RR 1 616 049 thousand). Refer to Note 28. Maturity and interest rate analyses of subordinated debt are disclosed in Note 24. Information on related party balances is disclosed in Note 30. 17
Share Capital Number of outstanding shares in thousands
Ordinary shares
Share premium
Total
At 1 January 2008
3 500
1 773 900
371 538
2 145 438
At 31 December 2008
3 500
1 773 900
371 538
2 145 438
At 31 December 2009
3 500
1 773 900
371 538
2 145 438
In thousands of Russian Roubles except for number of shares
The par value registered amount of the Bank’s issued share capital prior to restatement of capital contributions made before 1 January 2003 to the purchasing power of the Russian Rouble at 31 December 2002 is RR 1 750 000 thousand (2008: RR 1 750 000 thousand). At 31 December 2009, all of the Bank’s outstanding shares were authorised, issued and fully paid in. All ordinary shares have a par value of RR 500 per share (2008: RR 500 per share) and rank equally. Each share carries one vote. Share premium represents the excess of contributions received over the par value of shares issued.
31
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 18
Other Reserves
In thousands of Russian Roubles
Revaluation reserve for available-forsale securities
Total
At 1 January 2008 Revaluation Realised revaluation reserves Income tax effects
17 256 (86 667) 30 808 12 080
17 256 (86 667) 30 808 12 080
At 31 December 2008 Revaluation Realised revaluation reserves Income tax effects
(26 523) 74 483 354 (14 967)
(26 523) 74 483 354 (14 967)
33 347
33 347
At 31 December 2009
Revaluation reserve for available-for-sale securities is transferred to profit or loss when realised through sale or impairment. In accordance with Russian legislation, the Bank distributes profits as dividends or transfers them to reserves on the basis of financial statements prepared in accordance with Russian Accounting Rules. The Bank’s reserves under Russian Accounting Rules at 31 December 2009 amount to RR 2 173 104 thousand (2008: RR 1 736 077 thousand). The main reasons for differences between retained earnings determined in accordance with Russian Accounting Rules and retained earnings disclosed in these financial statements are connected with loan provisioning, bonuses accrual, deferral of loan commissions. 19
Interest Income and Expense
In thousands of Russian Roubles
2009
2008
Interest income Loans and advances to customers Cash and cash equivalents Due from other banks Debt investment securities available for sale Other
2 806 965 327 134 121 028 91 398 533
2 496 581 220 206 155 800 157 035 10 888
Total interest income
3 347 058
3 040 510
Interest expense Due to other banks Customer accounts Subordinated debt Other
1 341 079 505 056 40 640 1 584
1 436 417 406 396 58 454 22 791
Total interest expense
1 888 359
1 924 058
Net interest income
1 458 699
1 116 452
32
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 20
Fee and Commission Income and Expense
In thousands of Russian Roubles
2009
2008
Fee and commission income Consultancy and other services provided to the Parent bank Agency fees Currency control Guarantees and letters of credit issued Settlement operations Consulting fees Other
213 359 99 746 87 399 86 682 17 468 3 071 9 677
65 316 93 677 62 180 19 603 9 713 3 164
Total fee and commission income
517 402
253 653
Fee and commission expense Guarantees and letters of credit received Agency fees Foreign exchange operations Other
402 639 60 468 14 979 22 760
314 073 19 660 17 925 6 384
Total fee and commission expense
500 846
358 042
2009
2008
1 367 646 181 683 155 175 49 623 45 871 41 127 40 161 25 121 19 340 36 586 1 421 4 571
1 009 620 203 543 76 863 45 798 40 461 16 811 51 286 32 456 51 402 34 326 33 421 66 543
1 968 325
1 662 530
21
Administrative and Other Operating Expenses
In thousands of Russian Roubles Staff costs Rent expense IT maintenance and data processing Depreciation of equipment Other costs related to equipment Depreciation of intangible assets Business travel and related expenses Professional services Communication and transportation Taxes other than on income Recruitment Other Total administrative and other operating expenses
Note
11 11
Included in staff costs are unified social taxes of RR 106 082 thousand (2008: RR 78 711 thousand), which include contributions to the state pension fund of RR 82 967 thousand (2008: RR 61 979 thousand). Included in staff costs for 2009 is the cash settled share-based compensation in the amount of RR 146 212 thousand (2008: nil).
33
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 22
Income Taxes
(a) Components of income tax expense Income tax expense comprises the following: In thousands of Russian Roubles
2009
2008
Current income tax Deferred income tax
241 278 65 003
302 565 (3 848)
Income tax expense for the year
306 281
298 717
(b) Reconciliation between the tax expense and profit or loss multiplied by applicable tax rate The income tax rate applicable to the Bank’s 2009 income is 20% (2008: 24%). The reconciliation between the expected and the actual taxation charge is provided below: In thousands of Russian Roubles Profit before tax Theoretical tax charge at statutory rate (2009: 20%; 2008: 24%) Tax effect of items which are not deductible or assessable for taxation purposes: - Non-deductible expenses - Income on government securities taxed at different rates - Impact of change in tax rate to 20% effective from 1 January 2009 Income tax expense for the year
2009
2008
1 404 381
1 123 622
280 876
269 669
29 205 (3 800) 306 281
29 270 (11 976) 11 754 298 717
On 26 November 2008, the Russian Federation reduced the standard corporate income tax rate from 24% to 20% with effect from 1 January 2009. The impact of the change in tax rate presented above represents the effect of applying the reduced 20% tax rate to deferred tax balances at 31 December 2008. (c) Deferred taxes analysed by type of temporary difference Differences between IFRS and statutory taxation regulations in Russia give rise to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their tax bases. The tax effect of the movements in these temporary differences is detailed below and is recorded at the rate of 20% (2008: 20%), except for income on state securities, which is taxed at 15% (2008: 15%). 1 January 2009 In thousands of Russian Roubles Tax effect of deductible/(taxable) temporary differences Premises and equipment: Loan impairment provision Fair valuation of derivatives Fair valuation of investment securities available for sale Deferral of fees Accruals Net deferred income tax asset/(liability)
Charged/ (credited) to profit or loss
Charged / 31 December (credited) 2009 directly to equity
4 028 (42 702) 20 816
(5 980) (58 949) 16 302
-
(1 952) (101 651) 37 118
6 631 23 655 52 966
(108) (16 268)
(14 967) -
(8 336) 23 547 36 698
65 394
(65 003)
(14 967)
(14 576)
34
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 22
Income Taxes (Continued) 1 January 2008
In thousands of Russian Roubles Tax effect of deductible/(taxable) temporary differences Premises and equipment: Loan impairment provision Fair valuation of derivatives Fair valuation of investment securities available for sale Deferral of fees Accruals Tax loss carry forwards Net deferred income tax asset
23
Charged/ (credited) to profit or loss
Charged / 31 December (credited) 2008 directly to equity
(1 790) (36 335) (23 527)
5 818 (6 367) 44 343
-
4 028 (42 702) 20 816
(5 449) 12 801 73 093 30 673
10 854 (20 127) (30 673)
12 080 -
6 631 23 655 52 966 -
49 466
3 848
12 080
65 394
Segment Analysis
Starting from 1 January 2009, the Bank prepares its segment analysis in accordance with IFRS 8, Operating segments, which replaced IAS 14, Segment reporting. The Bank has prepared the segment analysis on a voluntary basis as it has plans for issuing Russian Rouble denominated bonds on the Russian financial market. Operating segments are components that engage in business activities that may earn revenues or incur expenses, whose operating results are regularly reviewed by the chief operating decision maker (CODM) and for which discrete financial information is available. The CODM is the person or group of persons who allocates resources and assesses the performance for the entity. The functions of CODM are performed by the Supervisory Board of the Bank. (a) Description of products and services from which each reportable segment derives its revenue The Bank is organised on the basis of two main business segments:
Corporate and Investment Banking (CIB), which includes advisory and capital markets (fixed income and foreign exchange, corporate finance, cash management) and financing (specialised and structured financing) businesses.
Consumer Finance (Cetelem), which covers consumer loans in points of sale, car loans, and revolving credit cards.
(b) Factors that management used to identify the reportable segments The Bank’s segments are strategic business units that focus on different customers. They are managed separately because each business unit requires different marketing strategies and service level. Segment financial information reviewed by the CODM includes operational results of the segments. Segment’s balance sheet asset information is reported only in relation of credit portfolio: corporate loans and consumer loans. (c) Measurement of operating segment profit or loss, assets and liabilities The CODM evaluates performance of each segment based on profitability of the segments (revenue, cost of risk, expenses, net income before tax).
35
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 23
Segment Analysis (Continued)
(d) Information about reportable segment profit or loss Segment information for the reportable segments for the year ended 31 December 2009 is set out below: CIB
Consumer Finance
Total
Interest margin Other revenue
1 244 969 2 329 518
213 730 148 850
1 458 699 2 478 368
Total revenues
3 574 487
362 580
3 937 067
Provision for loan impairment Staff costs Rent expenses Administrative and other operating expenses
(421 989) (769 033) (64 718) (270 109)
(142 372) (598 613) (116 965) (148 887)
(564 361) (1 367 646) (181 683) (418 996)
Segment pre-tax income
2 048 638
In thousands of Russian Roubles
(644 257)
1 404 381
Segment information for the reportable segments for the year ended 31 December 2008 is set out below: CIB
Consumer Finance
Interest margin Other revenue
1 067 568 1 845 833
48 884 3 514
1 116 452 1 849 347
Total revenues
2 913 401
52 398
2 965 799
(67 971) (510 561) (59 949) (227 896)
(179 647) (1 044 028) (169 135) (449 367)
(813 979)
1 123 622
In thousands of Russian Roubles
Provision for loan impairment Staff costs Rent expenses Administrative and other operating expenses Segment pre-tax income
(111 676) (533 467) (109 186) (221 471) 1 937 601
Total
Other revenue includes fee and commission income and expenses, gains less losses from financial derivatives, gains less losses from trading in foreign currencies, foreign exchanges translation gains less losses, losses net of gains from disposal of investment securities available for sale, other operating income, gains less losses from disposal of loan portfolio. Segment information for the reportable segments for the year ended 31 December 2009 is set out below: CIB
Consumer finance
Total
Total reportable segment assets
32 285 857
2 382 735
34 668 592
Total reportable segment liabilities
27 499 773
2 420 986
29 920 759
In thousands of Russian Roubles
36
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 23
Segment Analysis (Continued)
Segment information for the reportable segments for the year ended 31 December 2008 is set out below: CIB
Consumer finance
Total
Total reportable segment assets
70 277 943
1 183 286
71 461 229
Total reportable segment liabilities
66 655 255
1216 111
67 871 366
In thousands of Russian Roubles
(e) Geographical information All revenue and expenses reported under operational segments results are from Russia. (f) Major customers The Bank has no customers which represent 10% of more of the total revenues of the segments. 24
Financial Risk Management
The risk management function within the Bank is carried out in respect of financial risks (credit, market, and liquidity risks), operational risks and legal risks. Financial risk comprises market risk (including currency risk, interest rate risk and other price risk), credit risk and liquidity risk. The primary objectives of the financial risk management function are to establish risk limits, and then ensure that exposure to risks stays within these limits. The operational and legal risk management functions are intended to ensure proper functioning of internal policies and procedures to minimise operational and legal risks. The Bank is part of the BNP Paribas Group (the “Group”). At Group, operating methods and procedures throughout the organization are geared towards effectively addressing financial risks. The entire process is supervised primarily by the Group Risk Management Department, which is responsible for measuring and controlling risks at Group level. Risk Management Department of the Group is independent from the divisions, business lines and territories and reports directly to Group Executive Management. Compliance Department of the Group monitors operational and reputation risk as part of its responsibility for permanent controls. Risk Management Department has Group level and local levels. In the Bank, the Risk Management Department consists of the Credit Risk department, the Market and Liquidity Risk department and the Operational Risk department. These units report directly to the Risk Management Department at Group level. Responsibility for the Bank’s risk management activities are divided among the following units: Risk Management Department, Compliance Department and other authorized bodies of the Bank within the scope of responsibilities delegated by the Supervisory and Management Board of the Bank and with accordance with the Bank’s Charter.
37
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 24
Financial Risk Management (Continued)
While front-line responsibility for managing risks lies with the divisions and business lines that propose the underlying transactions, Risk Management Department is responsible for providing assurance that the risks taken by the Bank comply and are compatible with its risk policies and its profitability and rating objectives. Risk Management Department, and Compliance Department for operational and reputation risk, perform continuous, generally ex-ante controls that are fundamentally different from the periodic, expost examinations of the Internal Auditors. Risk Management Department reports regularly to the Internal Control and Risk Management Committee of the Board on its main findings, as well as on the methods used by Risk Management Department to measure these risks and consolidate them on a Group-wide basis. Compliance Department reports to the Committee on issues relevant to its remit, particularly those concerning operational risk, financial security, reputation risk and permanent controls. Risk Management Department covers risks resulting from the Group's business operations. It intervenes at all levels in the risk taking and monitoring process. Its remit includes formulating recommendations concerning risk policies, analysing the loan portfolio on a forward-looking basis, approving corporate loans and trading limits, guaranteeing the quality and effectiveness of monitoring procedures, defining and/or validating risk measurement methods, and producing comprehensive and reliable risk reporting data for Group management. Risk Management Department is also responsible for ensuring that all the risk implications of new businesses or products have been adequately evaluated. These evaluations are performed jointly by the sponsoring business line and all the functions concerned (Group Tax Department, Group Legal Department, Finance and Development, Group Compliance and Information Technology and Processes). The quality of the validation process is overseen by Risk Management Department, which reviews identified risks and the resources deployed to mitigate them, as well as defining the minimum criteria to be met to ensure that growth is based on sound business practices. Compliance Department has identical responsibilities as regards operational and reputation risk. It plays an important oversight and reporting role in the process of validating new products or business activities and exceptional transactions. In the Bank, risk management is addressed by the following structures: the Board, Risk Management Department, Compliance Department, Credit Committee (which consists of one representative of Risk Management Department and one representative of the business line), Treasury department (which consists of Fixed Income Department and Asset-Liabilities Management department, the Asset and Liabilities Committee, Middle office department and Finance department. Credit risk. The Bank takes on exposure to credit risk, which is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. Exposure to credit risk arises as a result of the Bank’s lending and other transactions with counterparties giving rise to financial assets. The Bank’s maximum exposure to credit risk is reflected in the carrying amounts of financial assets on the statement of financial position. The impact of possible netting of assets and liabilities to reduce potential credit exposure is not significant. For guarantees and commitments to extend credit, the maximum exposure to credit risk is the amount of the commitment. Refer to Note 26. The credit risk is mitigated by guaranties received from the entities of the Group and other collateral as disclosed in Note 9. The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to geographical and industry segments. Limits on the level of credit risk by product and industry sector are approved regularly by management. Such risks are monitored on a revolving basis and subject to an annual or more frequent review. Loan applications originated by the relevant client relationship managers are passed on to the relevant credit committee for approval of credit limit. Exposure to credit risk is also managed, in part, by obtaining collateral and corporate and personal guarantees. In order to monitor credit risk exposures, regular reports are produced by the Risk Management Department officers based on a structured analysis focusing on the customer’s business and financial performance. Any significant exposures against customers with deteriorating creditworthiness are reported to and reviewed by the Board of Directors. Management monitors and follows up on past due balances. The Bank’s risk department reviews ageing analysis of outstanding loans and follows up on past due balances. Management therefore considers it appropriate to provide ageing and other information about credit risk as disclosed in Note 9.
38
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 24
Financial Risk Management (Continued)
Credit risk for off-balance sheet financial instruments is defined as the possibility of sustaining a loss as a result of another party to a financial instrument failing to perform in accordance with the terms of the contract. The Bank uses the same credit policies in assuming conditional obligations as it does for onbalance sheet financial instruments, through established credit approvals, risk control limits and monitoring procedures. Credit risk is the risk of incurring a financial loss on loans and receivables (existing or potential due to commitments given) as a result of credit quality migration of the Bank's debtors, which can result in default. Credit quality is primarily measured based on the probability of default, combined with expected recovery of the loan or receivable in the event of default. Credit risk is measured at portfolio level based on groups of loans and/or receivables with similar credit risk characteristics, taking into account correlations between the values of the loans and receivables making up the portfolio concerned. Credit risk arises in relation to lending operations as well as market, investing and/or payment transactions that potentially expose the Bank to the risk of counterparty default. Counterparty risk is the bilateral credit risk relating to the third party, with which a transaction is entered into. The amount of this risk varies over time in line with market parameters that impact the value of the transaction. Management of credit risk General credit policy and credit control and provisioning procedures The Bank's lending activities are governed by the Global Credit Policy approved by the Risk Policy Committee, chaired by the Chief Executive Officer of the Bank. The purpose of the Committee is to determine the Bank's risk management strategy. The policy is underpinned by core principles related to compliance with the Bank's ethical standards, clear definition of responsibilities, the existence and implementation of procedures and thorough analysis of risks. It is rolled down in the form of specific policies tailored to each type of business or counterparty. Decision-making procedures A system of discretionary lending limits has been established, under which all lending decisions must be approved by a formally designated member of Risk Management Department. Approvals are systematically evidenced in writing, either by means of a signed approval form or in the minutes of formal meetings of a Credit Committee. Discretionary lending limits correspond to aggregate commitments by business group and vary according to internal credit ratings and the specific nature of the business concerned. Certain types of lending commitments, such as loans to banks, sovereign loans and loans to customers operating in certain industries, and also certain level of credit exposure, are required to be passed up to a higher level Credit Committee for approval. In addition, an industry expert or designated specialist may also be required to sign off on the loan application. In Retail Banking, different steps and checks are performed automatically to assess the applicant and make loan granting decision. One of the important steps in decision making is a score model, qualifying applicants by probability to be in overdue. Loan applications must comply with the Bank's Global Credit Policy and with relevant specific policies, and must in all cases comply with the applicable laws and regulations. In particular, before making any commitments the Bank carries out an in-depth review of any known development plans of the borrower, and ensures that it has thorough knowledge of all the structural aspects of the borrower's operations and that adequate monitoring will be possible. The Bank’s Credit Committee, represented by the Chief Executive Officer and the head of Credit Risk Department – Senior Credit Officer, is a decision-making authority for credit risks taken by the Bank.
39
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 24
Financial Risk Management (Continued)
Monitoring procedures A comprehensive risk monitoring and reporting system has been established in the Bank in accordance with the Group standards. The system is organised around Credit Risk Control and Reporting unit within the Credit Risk Department, which is responsible for ensuring that lending commitments comply with the loan approval decision, that credit risk reporting data are reliable and that risks accepted by the Bank are effectively monitored. Daily irregular and exception reports are produced and various forecasting tools are used to provide early warnings of potential escalations of credit risks. Monitoring is carried out, generally reflecting the organization of discretionary lending limits. The Credit Risk Control team reports to Senior Credit Officer and to respective Risk Management Department unit at Head Office level and to the Bank’s Watchlist and Debtor Committee. This Committee meets at monthly intervals to examine all sensitive or problem loans in excess of a certain amount. Its responsibilities include deciding on any adjustments to impairment provisions, based on the recommendations of the business line and Risk Management Department. A tailored system is applied in the Retail Banking business. Impairment procedures Risk Management Department reviews all corporate, bank and sovereign loans in default at monthly intervals to determine the amount of any impairment loss to be recognised, either by reducing the carrying amount or by recording a provision for impairment. The amount of the impairment loss is based on the present value of probable net recoveries, including from the realisation of collateral. An advanced automatic system for impairment decisions, movements and reporting is installed in the Bank and is used by the entitled representatives of the business lines, Finance and Risk Management Department. In addition, a collective impairment is established for each core business on a statistical basis. A committee comprising the Core Business Director, the Bank’s Chief Financial Officer and the head of Risk Management Department at the Group level meets quarterly to determine the amount of the impairment. This is based on simulations of losses to maturity on portfolios of loans whose credit quality is considered as impaired, but where the customers in question have not been identified as in default (i.e. loans not covered by specific impairment). The simulations carried out by Risk Management Department use the parameters of the internal rating system described below. Internal rating system The Bank has a comprehensive internal rating system. A periodic assessment and control process has been deployed to ensure that the system is appropriate and correctly implemented. For corporate loans, the system is based on three parameters: the counterparty's probability of default expressed via a rating, global recovery rate (or loss given default), which depends on the structure of the transaction, and the credit conversion factor, which estimates the portion of off-balance sheet exposure at risk. There are twelve counterparty ratings. First ten cover performing clients with credit assessments ranging from "excellent" to "very concerning", and the last two ratings relate to clients classified as in default, as per the definition by the banking supervisor.
40
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 24
Financial Risk Management (Continued)
The table below is for indicative purpose only. It compares BNP Paribas Rating Scale with the rating agencies ‘Long Term Local Currency Issuer Credit Ratings’ and ‘Long Term Local Currency Senior Unsecured Ratings’.
Default
Non-Investment Grade
Investment Grade
BNP Paribas 1+ 1 12+ 2 23+/3/34+/4/45+/5/56+ 6/67+/7 78+/8/89+/9/910+ 10 1011
12
Long Term Issuer / Unsecured issues ratings Moody’s S&P’s Fitch IBCA Aaa AAA AAA Aa1 AA+ AA+ Aa2 AA AA Aa3 AAAAA1, A2 A+, A A+, A A3 AABaa1 BBB+ BBB+ Baa2 BBB BBB Baa3 BBBBBBBa1 BB+ BB+ Ba2 BB BB Ba3 BBBBB1 B+ B+ B2 B B B3 BBCaa1, Caa2, Caa3 CCC+, CCC,CCCCCC+, CCC, CCCCa CC CC C C C D SD/D DDD/DD/D
-
-
-
Ratings are determined at least once a year, in connection with the loan approval process, drawing on the combined expertise of business line staff and Risk Management Department credit risk managers, who have the final say. High quality tools have been developed to support the rating process, including analysis aids and credit scoring systems. The decision to use these tools and the choice of technique depends on the nature of the risk and type of loan. Where external ratings exist, they are taken into account by mapping the internal rating scale against the external ratings based on the one-year default probability for each rating. The Bank's internal rating for an exposure is not necessarily the same as the external rating, and there is no strict correspondence between an external investment grade rating 4 and an internal rating equal to or higher than 5. Counterparties with a BBB- external rating may be rated 6 internally, even though an external BBB theoretically equates to an internal 5. Annual benchmarking studies are carried out at the Parent’s Bank level to compare internal and external ratings. Various quantitative and other methods are used to check rating consistency and the rating system's robustness. Loans to private customers and very small businesses are rated using statistical analyses of groups of risks with the same characteristics. Risk Management Department has overall responsibility for the quality of the entire system. This responsibility is fulfilled by either defining the system directly, validating it or verifying its performance. Loss given default is determined either using statistical models for books with the highest degree of granularity or using expert judgment based on comparative values, in line with a process similar to the one used to determine the counterparty rating for corporate books. Loss given default is the loss that the Bank would suffer in the event of the counterparty's default in economic downturn conditions. For each transaction, it is measured using the recovery rate for a senior unsecured exposure to the counterparty concerned, adjusted for any effects related to the transaction structure (e.g. subordination) and for the effects of any risk mitigation techniques (collateral and other security). Amounts recoverable against collateral and other security are estimated each year on a prudent basis and discounts are applied for realising security in a stressed environment.
41
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 24
Financial Risk Management (Continued)
Various credit conversion factors have been modelled by the Bank where permitted (i.e. excluding high risk transactions where the conversion factor is 100%), either using historical internal default data or other techniques when there is insufficient historical data. Conversion factors are used to measure the offbalance sheet exposure at risk in the event of borrower default. Unlike rating and recovery rate, this parameter is assigned automatically depending on the transaction type and is not determined by the Credit Committee. Each of the three credit risk parameters is back-tested and benchmarked annually at the Bank level to check the system's performance for each of the Bank's business segments. Back-testing consists of comparing estimated and actual results for each parameter. Benchmarking consists of comparing the parameters estimated internally with those of external organisations. For back-testing ratings, the default rate of populations in each rating category, or each group of risks with similar characteristics for retail banking operations is compared with the actual default rate observed on a year-by-year basis. An analysis by rating policy, rating, geographical area and rating method is carried out to identify any areas where the models might be underperforming. The stability of the rating and its population is also verified. The Bank has also developed back-testing techniques tailored to low default portfolios to assess the appropriateness of the system, even where the number of actual defaults is very low, such as sovereigns and banks, for example. The impacts of economic cycles are also taken into account. This back-testing work has so far proved that the ratings assigned by the Bank are “through the cycle” and that even factoring in the positive economic cycle, the forecast default rate is highly conservative. For benchmarking work on non-retail exposures, internal ratings are compared with the external ratings of several agencies based on the mapping between internal and external rating scales. Back testing of global recovery rates is based mainly on analysing recovery flows on exposures in default. When an exposure has been written off, each amount recovered is discounted back to the default date and calculated as a percentage of the exposure. When an exposure has not yet been written off, the amount of provisions taken is used as a proxy for future recoveries. The recovery rate determined in this way is then compared with the forecast rate. Like the rating parameter, recovery rates are analysed on an overall basis and by rating policy and geographical area. Variances on an item-by-item and average basis are analysed taking into account the bimodal distribution of recovery rates. The results of these tests show that the Bank's estimates are consistent with economic downturn conditions and are conservative on an average basis. Benchmarking of recovery rates is based on data pooling initiatives in which the Bank takes part. The credit conversion factor is also back-tested annually, although in less detail given the small volumes of available data. The result of all back-testing and benchmarking work is presented annually to the Chief Risk Officer and to the bodies responsible for overseeing the rating system and risk practitioners worldwide. These results and ensuing discussions are used to help set priorities in terms of developing methodology and deploying tools. Portfolio Policy In addition to carefully selecting and evaluating individual risks, the Bank follows a portfolio-based policy designed to diversify risks among borrowers, industries and countries. The results of this policy are regularly reviewed by the Risk Policy Committee, which may modify or fine-tune it as required, based on Risk Management Department's analyses and recommendations. Consumer Loans The Risk Management department assesses, prioritize and monitor credit risks. Individual borrowers are assigned scores in accordance with the credit risk assessment rules. Principle relative to credit models, particularly the need to develop discriminating and understandable models, and to model or observe risk indicators downstream in order to calibrate exposures. Risk indicators must be quantified based on historical data. 42
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 24
Financial Risk Management (Continued)
As to consumer loans (i.e. loans issued to individuals not being registered as entrepreneurs and acquiring loans for acquisition of consumer or other related goods or services not related to profit gaining), portfolio provisioning methods are applied, so the impairment is not decided individually but constant criteria are applied to portfolio or sub portfolio of loans. A loan is considered impaired as soon as a portion of the loan balance is overdue. Provisions are made for all impaired consumer loans following a migration model. The established specific provision is in accordance with the Group’s Personal Finance Risk Management Group. The migration model objective is to assess the probability for unpaid instalment from one specific period of time (e.g. 30 to 60 days) to remain overdue the next period (e.g. 60 to 90 days), up to the litigation phase. The coefficients of provision are applied to the outstanding split by level of late payments. Credit risk for off-balance sheet financial instruments is defined as the possibility of sustaining a loss as a result of another party to a financial instrument failing to perform in accordance with the terms of the contract. The Bank uses the same credit policies in assuming conditional obligations as it does for onbalance sheet financial instruments, through established credit approvals, risk control limits and monitoring procedures. Market risk. The Bank takes on exposure to market risks. Market risks arise from open positions in (a) currency, (b) interest rate, all of which are exposed to general and specific market movements. –
Interest rate risk covers potential fluctuations in the value of fixed-rate financial instruments due to changes in market interest rates, and in future cash flows on floating-rate financial instruments.
–
Currency risk is the risk that the value of an instrument or of future cash flows from that instrument will fluctuate due to changes in foreign exchange rates.
Market risks arise mainly on the trading activities carried out by the Fixed Income department within Corporate and Investment Banking. Management sets limits on the value of risk that may be accepted, which is monitored on a daily basis. However, the use of this approach does not prevent losses outside of these limits in the event of more significant market movements. Risk acceptance process Governance The market risk management system aims to track and control market risks whilst ensuring that the control functions remain totally independent from the business lines. The system is structured around several committees: –
The Capital Markets Risk Committee is the main committee governing the risks related to capital markets. It is responsible for addressing, in a coherent manner, the issues related to market and counterparty risk. The Capital Markets Risk Committee sets the aggregate trading limits, outlines risk approval procedures, and reviews loss statements and hypothetical losses estimated on the basis of stress tests. It meets twice a year and is chaired by the Group’s CEO. Other meetings may also be chaired by one of the Group's two COOs.
–
The Product and Financial Control Committee meets quarterly to review valuation issues and take any requisite decisions, such as validating master procedures. It is chaired by the Group's CFO and other members include the Chief Risk Officer, head of CIB and other representatives of Bank Development and Finance and the Risk Department.
–
At business unit level, the Valuation Review Committee meets monthly to examine and approve the results of Market Parameter Reviews and any changes in reserves. The committee is chaired by the Senior Trader and other members include representatives from trading, Risk Management Department, Group Product Control, and Group Development and Finance. The Valuation Review Committee also acts as the referee in any disagreements between trading and control functions.
–
Created in 2009, the Valuation Methodology Committee meets quarterly to monitor approvals and review models. 43
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 24
Financial Risk Management (Continued)
Limit setting and tracking Responsibility for setting and tracking limits is delegated to three levels, which are, in order, the Capital Markets Risk Committee, the Head of the Business Line and the Head of Trading. Limits may be changed either temporarily or permanently, authorised in accordance with the level of delegation and the prevailing procedures. Risk Management Department's responsibility in terms of market risk management is to define, measure and analyse sensitivities and risk factors, and to measure and control Value at Risk (VaR), which is the global indicator of potential losses. Risk Management Department ensures that all business activity complies with the limits approved by the various committees. In this respect, it also approves new activities and major transactions, reviews and approves position valuation models and conducts a monthly review of market parameters (Market Parameter review) in association with Group Product Control. Risk Management Department reports to Executive Management and business lines Senior Management on its risk analysis work. The Bank uses an integrated system called Market Risk eXplorer to follow the trading positions on a daily basis and manage VaR calculations. Market Risk eXplorer not only tracks VaR, but also detailed positions and sensitivities to market parameters based on various simultaneous criteria (currency, product, counterparty, etc.). Market Risk eXplorer is also configured to include trading limits, reserves and stress tests. Control processes Since 2007 the Group has enhanced its portfolio valuation controls by forming a Group Product Control team. This team works under a charter outlining its responsibilities (towards Risk Management Department, Group Development and Finance, the front-office, IT, and Operations) in terms of financial instrument valuations, gains or losses on capital market activities, and control processes. The team's main areas of involvement are: –
Transaction accounting;
–
Market Parameter Reviews (monthly reviews of book valuations);
–
Model reviews; and
–
Reserve calculations.
The procedures for these controls are discussed below. -
Transaction accounting controls
Operations (middle-office) is responsible for controlling the transaction accounting process, although Risk Management Department checks the process for more structured transactions requiring special attention. -
Market Parameter Review
Risk Management Department and Group Product Control are jointly responsible for Market Parameter Review. This review entails a formal verification of all market parameters and are generally performed monthly; the more liquid parameters are reviewed daily. Group Product Control checks the parameters where processes can be automated, while Risk Management Department checks the risk and market parameters requiring an in-depth analysis and an informed opinion. The information used for Market Parameter Reviews is obtained from brokers and suppliers of consensus market prices. The Market Parameter Review methodology is outlined in separate procedures for each major product line, which also set out the responsibilities of Risk Management Department and Group Product Control. All Market Parameter Review conclusions are documented, and the corresponding adjustments are made in the middle-office books. Market Parameter Review results are presented to business managers during Valuation Review Committee meetings.
44
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 24
Financial Risk Management (Continued)
-
Models review
The front-office quantitative analysts are mainly responsible for proposing new methodologies aiming to improve product valuation and risk calculation. The Research and IT teams then put them into practice. Risk Management Department is responsible for controlling and analysing these models. The main review processes are as follows: –
Model approval, which consists of performing a formal review when changes are made to a model's methodology (known as a "model event"). The approval process may be swift or it may be comprehensive, in which case the results of the review are documented in a Model Approval Report explaining the basis of and conditions for the approval.
–
Model testing, designed to test a model's quality and robustness. Other models may be used for calibration and comparison. The results of the testing are documented.
–
Product/model mapping, a process that examines whether pricing models are suited to their products and being used properly within the system, including checking the necessary configurations.
-
Reserve calculations
Risk Management Department defines and calculates "reserves", which correspond to fair value adjustments and are accounted for as deductions from earnings. Reserves can be considered, depending on the case, either as the price for closing a position or as a premium for a risk that cannot be diversified or hedged. Reserves mainly cover: –
Liquidity risk and bid/offer spreads;
–
Uncertainty and modelling risk.
The reserve mechanisms are documented in detail and Risk Management Department is responsible for implementing them Reserves for uncertainty and modelling risk are compatible with the "prudent valuation" regulatory approach but may not always be strictly in line with accounting standards such as discounts for large positions. In this case, the reserves are eliminated from the financial statements. The methodology for calculating reserves is regularly reviewed and improved as part of the Market Parameter and models review processes. Risk reports and information for Executive Management The Global Risk Analysis and Reporting team is responsible for generating risk reports. –
Regular risk reports
The following risk reports are generated on a regular basis: –
Weekly "Main Position" reports for each business line (equity derivatives, commodities, credit, and interest rate and currency derivatives), summarising all positions and highlighting items needing particular attention; these reports are sent to business line managers;
–
Bimonthly "Over EUR 15 million at Risk" reports sent to Executive Management;
–
"Capital Markets Risk Committee Events Summary" reports used as a basis for discussions during Capital Markets Risk Committee meetings;
–
"Position Highlights" reports focusing on specific issues; and
–
The "global risk dashboard" presented at bimonthly meetings between CIB and Risk Management Department managers to ensure coordinated efforts and make decisions in light of recent market developments and changes in counterparties' circumstances. 45
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 24
Financial Risk Management (Continued)
Measurement of market risk Market risk is measured using three types of indicator (sensitivities, VaR and stress tests), which aim to capture all risks. Measurement of market risk under normal market conditions: VAR VaR is calculated using an internal model. It estimates the potential loss on a trading portfolio under normal market conditions over one trading day, based on changes in the market over the previous 260 days with a confidence level of 99%.The model has been approved by the banking supervisor and takes into account of all usual risk factors (interest rates, credit spreads, exchange rates, equity prices, commodities prices, and associated volatilities), as well as the correlation between these factors in order to include the effects of diversification. It also takes into account of specific credit risk. The algorithms, methodologies and sets of indicators are reviewed and improved regularly to take into account of growing market complexity and product sophistication. Measurement of market risk under extreme market conditions The Bank performs stress tests to simulate the impact of extreme market conditions on the value of trading portfolios. These conditions are reflected in the extreme stress scenarios and adjusted to reflect changes in the economic environment. Risk Management Department uses 15 stress test scenarios covering all market activities: fixed-income, currency, equity derivatives, commodities and treasury. These scenarios are presented to and reviewed by the Capital Markets Risk Committee on a monthly basis. Risk Management Department may also outline specific scenarios to carefully manage some types of risks, most notably the more complex risks requiring a full revaluation rather than an estimate based on sensitivity indicators. The results of these stress tests may be presented to business line managers and stress test limits may be set. Analysis of sensitivities to market parameters Market risk is first analysed by systematically measuring portfolio sensitivity to various market parameters. The information thus obtained is used to set tolerance ranges for maturities and option strike prices. The results of these sensitivity analyses are compiled at various aggregate position levels and compared with market limits. VaR calculation methods are continually being improved to factor in new risks arising from changes in the structure of financial markets and products. VaR values (1 day, 99%) The Values at Risk (VaRs) set out below were calculated from an internal model. They are based on a 1-day time horizon and a 99% confidence interval. For the year ended 31 December 2009, total average Value at Risk was RR 16 735 thousand (with a maximum of RR 43 229 thousand), after taking into account the effect of netting the different types of risk (RR 2 989 thousand). These amounts break down as follows: In thousands of Russian Roubles
Average-year to Maximum-year to 31 December 2009 31 December 2009 31 December 2009
Interest rate risk Currency risk
15 799 3 925
43 311 14 911
1 073 5 983
Total Value at Risk
16 735
43 229
6 045
Effect of netting
(2 989)
(14 993)
(1 011)
46
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 24
Financial Risk Management (Continued)
For the year ended 31 December 2008, total average Value at Risk was RR 20 322 thousand (with a maximum of RR 48 646 thousand), after taking into account the effect of netting the different types of risk (RR 1 817 thousand). These amounts break down as follows: Average-year to Maximum-year to 31 December 2008 31 December 2008 31 December 2008
In thousands of Russian Roubles Interest rate risk Currency risk
20 282 1 857
48 690 16 780
39 586 14 880
Total Value at Risk
20 322
48 646
40 254
Effect of netting
(1 817)
(16 824)
(14 212)
Risk Management Department continuously tests the accuracy of its model through a variety of techniques, including a regular comparison over a long-term horizon between actual daily losses on capital market transactions and 1- day VaR. A 99% confidence level means that in theory the Bank should not incur daily losses in excess of VaR more than two or three days a year. Currency risk. In respect of currency risk, management sets limits on the level of exposure by currency and in total for both overnight and intra-day positions, which are monitored daily. Currency risk relates to all transactions whether part of the trading book or not. This risk is treated in the same way under both Basel I and Basel II. Exposure to currency risk is now determined under the standardised approach, using the option provided by the banking supervisor to limit the scope to operational currency risk. Currency risk is monitored by Fixed Income department, Middle office department and Finance department of the Bank daily. The Bank is also subject to the requirements of the CBRF for the monitoring of currency and liquidity risks. The compliance with all above-mentioned limits is achieved by matching of the currencies and maturities of assets and liabilities, which is controlled by the Asset-Liabilities Management department. The currency position is controlled daily. The forecast of currency position for the end of day is calculated by the Fixed Income department and by the Middle Office department, they are compared and corrective measures are taken if necessary before the end of day. Currency risk for Capital Markets activity of the Bank is monitored by the Market and Liquidity Risk department of the Bank daily. The table below summarises the Bank’s exposure to foreign currency exchange rate risk at the balance sheet date: In thousands of Russian Roubles
Monetary financial assets
At 31 December 2009 Monetary Derifinancial vatives liabilities
Russian Roubles US Dollars Euros Other
15 274 165 10 450 409 15 075 333 14 933 375 2 820 088 2 726 576 88 749 68 409
Total
33 258 335 28 178 769
Net position
Monetary financial assets
At 31 December 2008 Monetary Derivatives financial liabilities
Net position
(56 544) 4 767 212 11 962 227 17 028 977 8 780 271 3 713 521 (65 897) 76 061 46 338 143 36 502 911 (10 071 521) (236 289) (43 379) 50 133 6 813 539 6 407 330 (444 617) (38 408) 20 340 27 737 (557) 27 180 (165 820) 4 913 746 65 141 646 59 939 218 (1 736 424) 3 466 004
Derivatives presented above are monetary financial assets or monetary financial liabilities, but are presented separately in order to show the Bank’s gross exposure.
47
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 24
Financial Risk Management (Continued)
Amounts disclosed in respect of derivatives represent the fair value, at the end of the reporting period, of the respective currency that the Bank agreed to buy (positive amount) or sell (negative amount) before netting of positions and payments with the counterparty. The amounts by currency are presented gross as stated in Note 27. The net total represents the fair value of the currency derivatives. The above analysis includes only monetary assets and liabilities. Non-monetary assets are not considered to give rise to any material currency risk. Interest rate risk. The Bank takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Interest margins may increase as a result of such changes but may reduce or create losses in the event that unexpected movements arise. Management monitors on a daily basis and sets limits on the level of mismatch of interest rate repricing that may be undertaken. Interest rate risk management framework Interest rate risk on the commercial transactions of Cetelem and CIB's Corporate Banking divisions are managed by Asset-Liabilities Management-Treasury through the client intermediation book. Interest rate risk on the Bank's equity and investments is also managed by Asset-Liabilities Management-Treasury, in the equity intermediation and investments book. Transactions initiated by each BNP Paribas business line are transferred to Asset-Liabilities Management-Treasury via internal contracts booked in the management accounts or via loans and borrowings. Asset-Liabilities Management-Treasury is responsible for managing the interest rate risk inherent in these transactions. The main decisions concerning positions arising from banking intermediation activities are taken at monthly or quarterly committee meetings for each business line. These meetings are attended by the management of the business line, Asset-Liabilities Management-Treasury, Bank Development and Finance and Risk Management Department. Measurement of interest rate risk Maturities of outstanding assets are determined based on the contractual characteristics of the transactions and historical customer behaviour. For retail banking products, behavioural models are based on historical data and econometric studies. The models deal with early repayments, current accounts in credit and debit and savings accounts. Theoretical maturities of equity capital are determined according to internal assumptions. In the case of retail banking activities, structural interest rate risk is also measured on a going-concern basis, incorporating dynamic changes in balance sheet items, through an earnings sensitivity indicator. Due to the existence of partial or even zero correlations between customer interest rates and market rates, and the volume sensitivity caused by behavioural options, rotation of balance sheet items generates a structural sensitivity of revenues to interest rate changes. Lastly, for products with underlying behavioural options, a specific option risk indicator is analysed in order to fine-tune hedging strategies. The choice of indicators and risk modelling, as well as the production of indicators, are controlled by independent Product Control teams and by dedicated Bank Risk Management teams. The results of these controls are presented regularly to specialist committees and once a year to the Board of Directors. These indicators are systematically presented to the Asset-Liabilities Management committees, and serve as the basis for hedging decisions taking into account the nature of the risk involved. Risk limits Interest rate risk is transferred to Asset-Liabilities Management-Treasury on deal by deal basis for the Bank's Corporate Banking division and on portfolio basis for Cetelem. This risk is under the AssetLiabilities Management-Treasury limits. The residual risk is controlled by technical interest rate gap limits that are monitored by the Asset-Liabilities Management committee of the relevant business line.
48
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 24
Financial Risk Management (Continued)
The table below summarises the Bank’s exposure to interest rate risks. The table presents the aggregated amounts of the Bank’s financial assets and liabilities at carrying amounts, categorised by the earlier of contractual interest repricing or maturity dates.
In thousands of Russian Roubles 31 December 2009 Total financial assets Total financial liabilities Net interest sensitivity gap at 31 December 2009
Demand and less than 1 month
From 1 to 3 months
From 3 to 12 months
More than 1 year
Noninterestbearing
Total
20 664 118 19 730 376
1 552 438 5 498 181
3 561 512 3 265 746
4 846 361 170 648
3 703 559 749 291
34 327 988 29 414 242
295 766
4 675 713
2 954 268
4 913 746
11 829 864 11 915 977
1 819 858 4 043
5 932 414 7 546 638
71 001 074 67 535 070
1 815 815
(1 614 224)
3 466 004
933 742
(3 945 743)
31 December 2008 Total financial assets Total financial liabilities
41 175 473 35 065 527
10 243 465 13 002 885
Net interest sensitivity gap at 31 December 2008
6 109 946
(2 759 420)
(86 113)
Sensitivity of the value of banking books Since the books of financial instruments resulting from the Bank's banking activities (operations of the Bank excluding operations with foreign currency and derivatives) are not intended to be sold, they are not managed on the basis of their value. To comply with the financial reporting rules prescribed by IFRS, the Bank determines the value of the financial instruments that make up these books and the sensitivity of that value to interest rate fluctuations. The table below shows the sensitivity of the value of banking books, by currency and by maturity band, to an instantaneous movement of 100 basis points across the entire yield curve. This analysis takes into account all future cash flows generated by transactions outstanding at the reporting date, irrespective of maturity. The sensitivity data shown take account of the models used to generate theoretical maturities, especially on the Bank's equity. The sensitivity of the value of banking books to an instantaneous decrease for 100 basis points in interest rates was an increase in value in the event of a fall and a decrease in value in the event of a rise of RR 21 978 thousand at 31 December 2009, compared with RR 10 921 thousand at 31 December 2008. Interest rate sensitivity of the value of the Bank's customer banking and equity intermediation books at 31 December 2009 is set out below: In thousands of Russian Roubles RUB US dollars EUR Total
Demand and less than 1 month
From 1 to 3 months
From 3 to 12 months
(380) 567 137
2 509 1 550 123
1 447 (1 357) (42)
324
4 182
48
From Over 5 years 12 months to 5 years
Total
18 700 (1 200) 12
106 (194) -
22 382 (634) 230
17 512
(88)
21 978
49
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 24
Financial Risk Management (Continued)
Interest rate sensitivity of the value of the Bank's customer banking and equity intermediation books at 31 December 2008 is set out below:
In thousands of Russian Roubles
Demand and less than 1 month
From 1 to 3 months
From 3 to 12 months
From 12 months to 5 years
Over 5 years
Total
RUB US dollars EUR
(3 853) 2 622 159
1 723 6 256 263
1 383 3 468 (13)
(832) (4) (14)
(33) (204) -
(1 612) 12 138 395
Total
(1 072)
8 242
4 838
(850)
(237)
10 921
Hedging of interest rate and currency risks Hedging relationships initiated by the Bank mainly consist of interest rate or currency hedges in the form of swaps, options, forwards or futures. Depending on the hedging objective, derivative financial instruments used for hedging purposes are qualified as either fair value hedges, cash flow hedges, or hedges of net investments in foreign operations. Each hedging relationship is formally documented at inception. The documentation describes the hedging strategy; identifies the hedged item and the hedging instrument, and the nature of the hedged risk; and describes the methodology used to test the expected (prospective) and actual (retrospective) effectiveness of the hedge. Interest rate risk in the banking book The Bank's strategy for managing global interest rate risk is based on closely monitoring the sensitivity of the Bank's earnings to changes in interest rates. In this way, it can determine how to achieve an optimum level of offset between different risks. This procedure requires an extremely accurate assessment of the risks incurred so that the Bank can determine the most appropriate hedging strategy, after taking into account the effects of netting the different types of risk. These hedging strategies are defined and implemented for each portfolio - customer activities and own funds - and currency. No hedging relationship was disqualified from hedge accounting in 2009. Hedging of financial instruments recognised in the balance sheet (fair value hedges) Fair value hedges of interest rate risks relate either to identified fixed-rate assets or liabilities, or to portfolios of fixed-rate assets or liabilities. Derivatives are contracted to reduce the exposure of the fair value of these instruments to changes in interest rates. Identified assets consist of available-for-sale securities or corporate loans. Actual effectiveness is assessed on an ex-post basis by ensuring that the monthly change in the fair value of hedged items since the start of the month does not indicate any over-hedging.
50
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 24
Financial Risk Management (Continued)
The Bank monitors interest rates for its financial instruments. The table below summarises interest rates based on reports reviewed by key management personnel: In % p.a. Financial assets Placements with other banks with original maturities of less than 3 months Due from other banks Loans and advances to customers - Corporate loans - Loans to individuals Debt investment securities available for sale Financial liabilities Due to other banks Customer accounts - current and settlement accounts - term deposits Subordinated debt
RR
2009 USD
Euro
RR
2008 USD
Euro
4.7 8.1
0.6 0.6
0.3 -
15.7 16.9
0.3 1.4
2.0 5.1
12.8 46.3
3.7 -
4.7 -
22.4 35.1
5.1 -
7.5 -
7.6
-
-
5.9
-
-
6.0
0.7
1.1
18.3
2.3
3.5
0.0 4.3 -
0.0 0.1 1.7
0.0 0.5 -
0.0 16.6 -
0.0 0.6 2.9
0.0 2.6 -
The sign “-“ in the table above means that the Bank does not have the respective assets or liabilities in the corresponding currency. Liquidity risk. Liquidity and refinancing risk is the risk of the Bank being unable to fulfil current or future foreseen or unforeseen cash or collateral requirements without affecting routine transactions or its financial position. Liquidity and refinancing risk is managed through a global liquidity policy approved by Bank Executive Management. This policy is based on management principles designed to apply both in normal conditions and in a liquidity crisis. The Bank's liquidity position is assessed on the basis of internal standards, warning flags and regulatory ratios. Policy objectives The objectives of the Bank's liquidity management policy are to (i) secure a balanced financing mix to support BNP Paribas' development strategy; (ii) ensure that the Bank is always in a position to discharge its obligations to its customers; (iii) ensure that it does not trigger a systemic crisis solely by its own actions; (iv) comply with the standards set by the local banking supervisor; (v) keep the cost of refinancing as low as possible; and (vi) cope with any liquidity crises. Roles and responsibilities in liquidity risk management The Bank's Executive Committee sets the general liquidity risk management policy, including risk measurement principles, acceptable risk levels and the internal billing system. Responsibility for monitoring and implementation has been delegated to the Bank Asset-Liabilities Management Committee, which was created in 2009. The Internal Control, Risk Management and Compliance Committee report quarterly to the Board of Directors on liquidity policy principles and the Bank's position. Bank Asset-Liabilities Management Committee proposes procedures for implementing the liquidity policy set by the Executive Committee. These proposals are then reviewed and approved by the AssetLiabilities Management-CIB Committee. The Executive Committee is informed on a regular basis of liquidity indicators, results of stress tests, and the execution of financing programmes. It is also informed of any crisis situation, and is responsible for deciding on the allocation of crisis management roles and approving emergency plans. After validation by Bank Asset-Liabilities Management Committee, Asset-Liabilities ManagementTreasury is responsible for implementing the policy at both central and individual entity level. It is also owner of the systems used to manage liquidity risk. The business line and entity Asset-Liabilities Management committees implement at local level the strategy approved by Bank Asset-Liabilities Management Committee. 51
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 24
Financial Risk Management (Continued)
Risk Management Department contributes to defining liquidity policy principles. It also provides secondline control by validating the models, risk indicators (including liquidity stress tests), limits and market parameters used. Risk Management Department is a member of Bank Asset-Liabilities Management Committee and the business line’s Asset and Liabilities Committees. Centralised liquidity risk management Liquidity risk is managed centrally by Asset-Liabilities Management-Treasury across all maturities. The Treasury unit is responsible for refinancing and for short-term issues (certificates of deposit, commercial paper, etc.), while the Asset-Liabilities Management unit is responsible for senior and subordinated debt issues (MTNs, bonds, medium/long-term deposits, covered bonds, etc), preferred share issues, and loan securitisation programmes for the retail banking business and the financing business lines within Corporate and Investment Banking. Asset-Liabilities Management-Treasury is also tasked with providing financing to the Bank's core businesses and business lines, and investing their surplus cash. Day-to-day liquidity management is based on a full range of internal standards and warning flags at various maturities. An overnight target is set for each Treasury unit, limiting the amount raised on interbank overnight markets. This applies to the major currencies in which the Bank does business. The refinancing capacity needed to cope with an unexpected surge in liquidity needs is regularly measured at Bank level. It mainly comprises available securities and loans eligible for central bank refinancing, available ineligible securities that can be sold under repurchase agreements or immediately on the market, and overnight loans not liable to be renewed. Risk mitigation techniques As part of the day-to-day management of liquidity, in the event of a temporary liquidity crisis, the Bank's most liquid assets constitute a financing reserve enabling the Bank to adjust its treasury position by selling them on the repo market or discounting them with the central bank. If there is a prolonged liquidity crisis, the Bank may have to gradually reduce its total balance sheet position by selling assets outright. Some of the Bank’s less liquid assets (customer loans) may be collateralised within CBR refinancing facility. Liquidity risk is also reduced by the diversification of financing sources in terms of structure, investors, and secured/unsecured financing. The liquidity management of the Bank requires considering the level of liquid assets necessary to settle obligations as they fall due; maintaining access to a range of funding sources; maintaining funding contingency plans; and monitoring liquidity ratios against regulatory requirements. The Bank calculates liquidity ratios on a daily basis in accordance with the requirement of the Central Bank of Russia. These ratios are: -
Instant liquidity ratio (N2), which is calculated as the ratio of highly-liquid assets to liabilities payable on demand. The ratio was 84.9% at 31 December 2009 (2008: 81.2%).
-
Current liquidity ratio (N3), which is calculated as the ratio of liquid assets to liabilities maturing within 30 calendar days. The ratio was 70.25% at 31 December 2009 (2008: 73.7%).
-
Long-term liquidity ratio (N4), which is calculated as the ratio of assets maturing after one year to regulatory capital and liabilities maturing after one year. The ratio was 85.7% at 31 December 2009 (2008: 95.8%).
The Treasury Department (Asset-Liabilities Management) receives information about the liquidity profile of the financial assets and liabilities. The Treasury Department then provides for an adequate portfolio of liquid assets, largely made up of short-term liquid securities, deposits with banks and other inter-bank facilities, to ensure that sufficient liquidity is maintained within the Bank as a whole. The 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 Risk Management Department.
52
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 24
Financial Risk Management (Continued)
The table below shows liabilities at 31 December 2009 by their remaining contractual maturity. The amounts disclosed in the maturity table are the contractual undiscounted cash flows, including gross finance lease obligations (before deducting future finance charges), gross loan commitments and financial guarantees. Such undiscounted cash flows differ from the amount included in the statement of financial position because the amount in the statement of financial position is based on discounted cash flows. Net settled derivatives are included at the net amounts expected to be paid. When the amount payable is not fixed, the amount disclosed is determined by reference to the conditions existing at the end of the reporting period. Foreign currency payments are translated using the spot exchange rate at the end of the reporting period. The maturity analysis of financial instruments at 31 December 2009 is as follows: Demand and less than 1 month
From 1 to 3 months
From 3 to 12 months
From 12 months to 5 years
Over 5 years
Total
7 886 867 236 920
-
-
-
-
7 886 867 236 920
46 260 468 830
78 546 311 745
75 535 958 679
869 312 715 602
-
1 069 653 2 454 856
1 426 324
3 188 349
5 795 274
13 740 158
16 115
24 166 220
40 953 -
21 501 195 105
253 381 -
1 584 598 -
-
1 900 433 195 105
Total financial assets
10 106 154
3 795 246
7 082 869
16 909 670
16 115
37 910 054
Liabilities Fair value of derivative financial instruments Due to other banks Customer accounts Other financial liabilities Subordinated debt Credit related commitments (Note 26)
51 704 4 275 849 11 026 978 4 429 2 301
75 108 637 283 205 043 1 299 4 602
72 063 1 723 654 205 042 2 163 20 706
1 036 598 8 855 145 1 819 1 426 120
312 017
1 235 473 15 491 931 11 437 063 9 710 1 765 746
416 785
826 243
1 697 720
832 436
-
3 773 184
Total potential future payments for financial obligations
15 778 046
1 749 578
3 721 348
12 152 118
312 017
33 713 107
Liquidity gap arising from financial instruments
(5 671 892)
2 045 668
3 361 521
4 757 552
(295 902)
4 196 947
In thousands of Russian Roubles Assets Cash and cash equivalents Mandatory cash balances Derivative financial instruments Due from other banks Loans and advances to customers Investment securities available for sale Other financial assets
53
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 24
Financial Risk Management (Continued)
The maturity analysis of financial instruments at 31 December 2008 is as follows: Demand and less than 1 month
From 1 to 3 months
From 3 to 12 months
From 12 months to 5 years
Over 5 years
Total
17 579 506 108 397
-
-
-
-
17 579 506 108 397
331 949 303 577
1 570 732 225 205
3 956 747 804 560
1 882 674
-
5 859 428 3 216 016
7 537 159
6 978 219
15 594 899
17 893 843
395
48 004 515
15 245 -
12 413 -
670 251 72 986
339 977 -
-
1 037 886 72 986
Total financial assets
25 875 833
8 786 569
21 099 443
20 116 494
395
75 878 734
Liabilities Fair value of derivative financial instruments Due to other banks Customer accounts Other financial liabilities Subordinated debt Credit related commitments (Note 26)
724 917 15 202 227 14 338 619 428 -
2 183 369 5 463 503 1 529 151 858 11 586
4 635 060 10 768 614 3 551 34 757
52 506 11 422 251 4 043 1 386 274
319 335
7 595 852 42 856 595 15 867 770 8 880 1 751 952
440 794
1 033 313
2 510 100
1 413 471
-
5 397 678
Total potential future payments for financial obligations
30 706 985
10 221 780
17 952 082
14 278 545
319 335
73 478 727
Liquidity gap arising from financial instruments
(4 831 152) (1 435 211)
3 147 361
5 837 949
(318 940)
2 400 007
In thousands of Russian Roubles Assets Cash and cash equivalents Mandatory cash balances Derivative financial instruments Due from other banks Loans and advances to customers Investment securities available for sale Other financial assets
Customer accounts are classified in the above analysis based on contractual maturities. However, in accordance with Russian Civil Code, individuals have a right to withdraw their deposits prior to maturity if they forfeit their right to accrued interest.
54
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 24
Financial Risk Management (Continued)
The Bank does not use the above undiscounted maturity analysis to manage liquidity. Instead, the Bank monitors expected maturities, which may be summarised as follows as at 31 December 2009 and 31 December 2008: Demand and less than 1 month
From 1 to 3 months
From 3 to 12 months
Over 12 months
Total
At 31 December 2009 Financial assets Financial liabilities
9 688 125 15 346 084
3 447 293 901 340
5 882 175 1 734 906
15 310 395 11 431 912
34 327 988 29 414 242
Net liquidity gap based on expected maturities
(5 657 959)
2 545 953
4 147 269
3 878 483
4 913 746
At 31 December 2008 Financial assets Financial liabilities
25 295 777 30 805 127
8 387 650 9 036 607
19 767 399 15 041 342
17 550 248 12 651 994
71 001 074 67 535 070
Net liquidity gap based on expected maturities
(5 509 350)
4 726 057
4 898 254
3 466 004
In thousands of Russian Roubles
(648 957)
The matching and/or controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Bank. It is unusual for banks ever to be completely matched since business transacted is often of an uncertain term and of different types. An unmatched position potentially enhances profitability, but can also increase the risk of losses. The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature, are important factors in assessing the liquidity of the Bank and its exposure to changes in interest and exchange rates. Management believes that in spite of a substantial portion of customer accounts being on demand, diversification of these deposits by number and type of depositors, and the past experience of the Bank would indicate that these customer accounts provide a long-term and stable source of funding for the Bank. Liquidity requirements to support calls under guarantees and standby letters of credit are considerably less than the amount of the commitment because the Bank does not generally expect the third party to draw funds under the agreement. The total outstanding contractual amount of commitments to extend credit does not necessarily represent future cash requirements, since many of these commitments will expire or terminate without being funded. In 2009, the Bank continued its policy of diversifying its sources of financing in terms of structures, investors and collateralised financing. The following new facilities were approved and developed by the management of the Bank: reverse repo with BNPP London, pledge client loans to CBR. Standards and Poor’s rating was obtained, which can permit to obtain uncollateralized CBR funding if needed. Rouble bonds emission was pre-approved. Therefore the management believes that a short-term liquidity gap does not expose the Bank to a significant liquidity risk.
55
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 25
Management of Capital
The Bank’s objectives when managing capital are (i) to comply with the capital requirements set by the Central Bank of the Russian Federation and (ii) to safeguard the Bank’s ability to continue as a going concern. The amount of capital for statutory requirements that the Bank managed as of 31 December 2009 was RR 5 334 161 thousand (2008: RR 5 039 828 thousand). Compliance with capital adequacy ratios set by the Central Bank of the Russian Federation is monitored monthly with reports outlining their calculation reviewed and signed by the Bank’s Chief Executive Officer and Chief Accountant. Under the current capital requirements set by the Central Bank of Russia banks have to maintain a ratio of regulatory capital to risk weighted assets (“statutory capital ratio”) above a prescribed minimum level. Regulatory capital is based on the Bank’s reports prepared under Russian accounting standards and comprises: In thousands of Russian Roubles
2009
2008
Net assets under Russian GAAP Less intangible assets Less investment in shares Plus subordinated debt Plus income of current year
3 923 105 (22 754) (20) 1 119 035 314 795
3 539 254 (27 426) (20) 1 351 498 176 522
Total regulatory capital
5 334 161
5 039 828
The Bank has complied with all externally imposed capital requirements throughout 2009 and 2008. 26
Contingencies and Commitments
Legal proceedings. From time to time and in the normal course of business, claims against the Bank may be received. On the basis of its own estimates and both internal and external professional advice management is of the opinion that no material losses will be incurred in respect of claims and accordingly no provision has been made in these financial statements. Tax legislation. Russian tax and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management’s interpretation of such legislation as applied to the transactions and activity of the Bank may be challenged by the relevant authorities. The Russian tax authorities may be taking a more assertive and sophisticated approach in their interpretation of the legislation and tax examinations. This includes them following guidance from the Supreme Arbitration Court for anti-avoidance claims based on reviewing the substance and business purpose of transactions. Combined with a possible increase in tax collection efforts to respond to budget pressures, the above may lead to an increase in the level and frequency of scrutiny by the tax authorities. In particular, it is possible that transactions and activities that have not been challenged in the past may be challenged. As a result, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods. Russian transfer pricing legislation provides the possibility for tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of all controllable transactions, provided that the transaction price differs from the market price by more than 20%. Controllable transactions include transactions with interdependent parties, as determined under the Russian Tax Code, all cross-border transactions (irrespective whether performed between related or unrelated parties), transactions where the price applied by a taxpayer differs by more than 20% from the price applied in similar transactions by the same taxpayer within a short period of time, and barter transactions. There is no formal guidance as to how these rules should be applied in practice. In the past, the arbitration court practice in this respect has been contradictory.
56
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 26
Contingencies and Commitments (Continued)
Tax liabilities arising from transactions between companies are determined using actual transaction prices. It is possible with the evolution of the interpretation of the transfer pricing rules in the Russian Federation and the changes in the approach of the Russian tax authorities, that such transfer prices could be challenged. Given the brief nature of the current Russian transfer pricing rules, the impact of any such challenge cannot be reliably estimated; however, it may be significant to the financial position and/or the overall operations of the entity. Russian tax legislation does not provide definitive guidance in certain areas. From time to time, the Bank adopts interpretations of such uncertain areas that reduce the overall tax rate of the Bank. As noted above, such tax positions may come under heightened scrutiny as a result of recent developments in administrative and court practices. The impact of any challenge by the tax authorities cannot be reliably estimated; however, it may be significant to the financial position and/or the overall operations of the entity. Management estimates that the Bank does not have possible obligations from exposure to other than remote tax risks (2008: nil). Capital expenditure commitments. At 31 December 2009 and 31 December 2008 the Bank has no material contractual capital expenditure commitments in respect of premises and equipment. Contractual obligations for IT development, maintenance or enhancements RR 136 017 thousand at 31 December 2009 (2008: RR 113 590 thousand).
totalled
to
Operating lease commitments. Where the Bank is the lessee, the future minimum lease payments under non-cancellable operating leases are as follows: In thousands of Russian Roubles
2009
2008
Not later than 1 year Later than 1 year and not later than 5 years
148 151 125 381
197 377 346 134
Total operating lease commitments
273 532
543 511
Compliance with covenants. The Bank is not subject to any covenants related primarily to its borrowings as at 31 December 2009 and 31 December 2008. Credit related commitments. The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit, which represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods to which they relate or cash deposits and therefore carry less risk than a direct borrowing. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments, if the unused amounts were to be drawn down. However, the likely amount of loss is less than the total unused commitments since most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Bank monitors the term to maturity of credit related commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments.
57
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 26
Contingencies and Commitments (Continued)
Outstanding credit related commitments are as follows: In thousands of Russian Roubles
2009
2008
Import letters of credit Guarantees issued Export letters of credit Non-cancellable undrawn credit lines
3 067 990 705 194 -
3 990 768 477 661 553 670 375 579
Total credit related commitments
3 773 184
5 397 678
The total outstanding contractual amount of undrawn credit lines, letters of credit, and guarantees does not necessarily represent future cash requirements, as these financial instruments may expire or terminate without being funded. The fair value of credit related commitments was RR 3 773 184 thousand at 31 December 2009 (2008: RR 5 397 678 thousand). Deposits of RR 360 232 thousand (2008: RR 147 262 thousand) held as collateral for irrevocable commitments under import letters of credit are recorded in customer accounts. Refer to Note 14. Credit related commitments are denominated in currencies as follows: In thousands of Russian Roubles
2009
2008
Russian Roubles US Dollars EUR Other
663 145 621 598 2 420 032 68 409
829 966 649 183 3 914 409 4 120
Total credit related commitments
3 773 184
5 397 678
58
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 27
Derivative Financial Instruments
The table below sets out fair values, at the end of the reporting period, of currencies receivable or payable under foreign exchange forward contracts entered into by the Bank. The table reflects gross positions before the netting of any counterparty positions (and payments) and covers the contracts with settlement dates after the end of the respective reporting period. The contracts are short term in nature.
In thousands of Russian Roubles Foreign exchange forwards: fair values, at the balance sheet date, of - USD receivable on settlement (+) - USD payable on settlement (-) - Euros receivable on settlement (+) - Euros payable on settlement (-) - RR receivable on settlement (+) - RR payable on settlement (-) - Other currencies receivable on settlement (+) - Other currencies payable on settlement (-) Net fair value of foreign exchange forwards Foreign exchange swaps: fair values, at the balance sheet date, of - USD receivable on settlement (+) - USD payable on settlement (-) - Euros receivable on settlement (+) - Euros payable on settlement (-) - RR receivable on settlement (+) - RR payable on settlement (-) - Other currencies receivable on settlement (+) - Other currencies payable on settlement (-) Net fair value of foreign exchange swaps Cross currency interest rate swaps: fair values, at the balance sheet date, of - USD receivable on settlement (+) - USD payable on settlement (-) - RR receivable on settlement (+) - RR payable on settlement (-)
2009 Contracts Contracts with positive with negative fair value fair value
1 935 095 (5 389 789) 714 854 (619 344) 5 749 648 (1 902 575) 487 889
1 380 495 (1 279 955) 1 469 034 (1 375 642) 193 932
(2 129 058) 2 275 831 -
2 826 949 (1 988 375) 1 429 575 (714 854) 1 964 153 (3 976 557) (459 109)
2 509 082 (1 358 584) 426 346 1 347 028 (3 125 990) -
2008 Contracts Contracts with positive with negative fair value fair value
9 996 855 (143 302) 309 875 (9 349 145) 216 288 -
(9 247 677) (5 232 686) 13 159 637 (216 840)
1 030 571
(1 537 566)
14 218 396 (2 055 436) 240 045 2 061 647 (13 877 815) (216 295)
293 634 (23 128 400) 4 238 149 17 135 079 (296 627) 216 288 -
(202 118)
370 542
(1 541 877)
2 649 716 (501 430) 650 568 (3 232 972)
-
-
-
Net fair value of cross currency interest rate swaps
146 773
(434 118)
-
Interest rate swaps: fair values, at the balance sheet date
171 734
(70 803)
-
(58 094)
69 325
(69 325)
4 458 315
(4 458 315)
1 069 653
(1 235 473)
5 859 428
(7 595 852)
Options on foreign currency: fair values, at the balance sheet date Net fair value of derivatives financial instruments
59
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 27
Derivative Financial Instruments (Continued)
Foreign exchange and other derivative financial instruments entered into by the Bank are generally not quoted in active market and their fair value is determined by the Bank using valuation techniques with input observable in markets. Derivatives have potentially favourable (assets) or unfavourable (liabilities) conditions as a result of fluctuations in market interest rates, foreign exchange rates or other variables relative to their terms. The aggregate fair values of derivative financial assets and liabilities can fluctuate significantly from time to time. As at 31 December 2009 interest rate swaps and cross currency interest rate swaps with negative fair value of RR 214 804 thousand are used for hedging of the loans and advance to customers and investment securities available for sale (2008: negative fair value of RR 58 094 thousand). Refer to Notes 9, 10. At 31 December 2009, the Bank had outstanding obligations from unsettled spot transactions with foreign currencies of RR 1 294 thousand (2008: nil thousand). The net fair value of unsettled spot transactions is insignificant. 28
Fair Value of Financial Instruments
(a) Fair values of financial instruments carried at amortised cost. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by an active quoted market price. The estimated fair values of financial instruments have been determined by the Bank using available market information, where it exists, and appropriate valuation methodologies. However, judgement is necessarily required to interpret market data to determine the estimated fair value. The Russian Federation continues to display some characteristics of an emerging market and economic conditions continue to limit the volume of activity in the financial markets. Market quotations may be outdated or reflect distress sale transactions and therefore not represent fair values of financial instruments. Management has used all available market information in estimating the fair value of financial instruments. Financial instruments carried at fair value. Investment securities available for sale are carried on the balance sheet at their fair value. Their fair values were determined based on quoted market prices. All derivative financial instruments are carried at fair value as assets when the fair value is positive and as liabilities when the fair value is negative. The fair values of derivatives are based on observable market prices or valuation models. Loans and receivables carried at amortised cost. The fair value of floating rate instruments is normally their carrying amount. The estimated fair value of fixed interest rate instruments is based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. Cash and cash equivalents are carried at amortised cost, which approximates current fair value, refer to Note 7. See Notes 8 and 9 for estimated fair value of due from other banks and loans and advances to customers, respectively. Liabilities carried at amortised cost. The fair value of floating rate instruments is normally their carrying amount. The estimated fair value of fixed interest rate instruments with stated maturity, for which a quoted market price is not available, was estimated based on expected cash flows discounted at current interest rates for new instruments with similar credit risk and remaining maturity. The fair value of liabilities repayable on demand or after a notice period (“demandable liabilities”) is estimated as the amount payable on demand, discounted from the first date that the amount could be required to be paid. Refer to Notes 13, 14 and 16 for the estimated fair values of due to other banks, customer accounts and for subordinated debt, respectively.
60
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 28
Fair Value of Financial Instruments (Continued)
(b) Analysis by fair value hierarchy of financial instruments carried at fair value. For financial instruments carried at fair value, the levels in the fair value hierarchy into which the fair values are categorised are as follows:
In thousands of Russian Roubles FINANCIAL ASSETS Investment securities available for sale - Municipal bonds - Federal loan bonds (Russian government) Derivatives financial assets carried at fair value - Foreign exchange forward contracts - Interest rate swaps - Options on foreign currency TOTAL FINANCIAL ASSETS CARRIED AT FAIR VALUE
In thousands of Russian Roubles
2009 Quoted price Valuation in an active technique with market inputs (Level 1) observable in markets (Level 2)
2008 Quoted price Valuation in an active technique with market inputs (Level 1) observable in markets (Level 2)
313 328
-
-
-
1 373 774
-
966 890
-
-
681 821 318 507 69 325
-
1 401 113 4 458 315
1 687 102
1 069 653
966 890
5 859 428
2009 Quoted price Valuation in an active technique with market inputs (Level 1) observable in markets (Level 2)
2008 Quoted price Valuation in an active technique with market inputs (Level 1) observable in markets (Level 2)
FINANCIAL LIABILITIES Derivatives financial liabilities carried at fair value - Foreign exchange forward contracts - Interest rate swaps - Options on foreign currency
-
661 227 504 921 69 325
-
3 079 443 58 094 4 458 315
TOTAL FINANCIAL LIABILITIES CARRIED AT FAIR VALUE
-
1 235 473
-
7 595 852
The Bank uses discounted cash flow valuation techniques to determine the fair value of derivative financial instruments that are not traded in an active market. Where valuation techniques (for example, models) are used to determine fair values, they are validated and periodically reviewed by qualified personnel independent of the area that created them. All models are certified before they are used, and models are calibrated to ensure that outputs reflect actual data and comparative market prices. These models use observable market inputs, therefore, derivative financial instruments are reported as level 2.
61
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 29
Presentation of Financial Instruments by Measurement Category
For the purposes of measurement, IAS 39, Financial Instruments: Recognition and Measurement, classifies financial assets into the following categories: (a) loans and receivables; (b) available-for-sale financial assets; (c) financial assets at fair value through profit or loss (“FVTPL”). Financial assets at fair value through profit or loss have two subcategories: (i) assets designated as such upon initial recognition, and (ii) those classified as held for trading. The following table provides a reconciliation of financial assets with these measurement categories as of 31 December 2009: In thousands of Russian Roubles Assets Cash and cash equivalents Mandatory cash balances Derivative financial instruments Due from other banks - Short-term placements with other banks with original maturities from three months to one year - Long-term placements with other banks with original maturities of more than one year Loans and advances to customers - Corporate loans - Loans to individuals - consumer loans Investment securities available for sale Other financial assets Total financial assets
Loans and Available-forreceivables sale assets
Trading assets
Hedging
Total
7 880 538 236 920 2 287 117
-
901 389 -
168 264 -
7 880 538 236 920 1 069 653 2 287 117
1 680 969
-
-
-
1 680 969
606 148
-
-
-
606 148
20 971 553 18 856 179
-
-
-
20 971 553 18 856 179
2 115 374
-
-
-
2 115 374
195 105
1 687 102 -
-
-
1 687 102 195 105
31 571 233
1 687 102
901 389
168 264
34 327 988
As of 31 December 2009 and 31 December 2008 all of the Bank’s financial liabilities except for derivatives were carried at amortised cost. Derivatives belong to the fair value through profit or loss measurement category.
62
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 29
Presentation of Financial Instruments by Measurement Category (Continued)
The following table provides a reconciliation of financial assets with the measurement categories defined in IAS 39, Financial Instruments: Recognition and Measurement, as of 31 December 2008:
In thousands of Russian Roubles Assets Cash and cash equivalents Mandatory cash balances Derivative financial instruments Due from other banks - Short-term placements with other banks with original maturities from three months to one year - Long-term placements with other banks with original maturities of more than one year Loans and advances to customers - Corporate loans - Loans to individuals - consumer loans Investment securities available for sale Other financial assets Total financial assets
Loans and receivables
Availablefor-sale assets
Trading assets
Hedging
Total
17 579 506 108 397 2 676 236
-
5 859 428 -
-
17 579 506 108 397 5 859 428 2 676 236
736 230
-
-
-
736 230
1 940 006
-
-
-
1 940 006
43 737 631 42 822 759
-
-
-
43 737 631 42 822 759
914 872
-
-
-
914 872
72 986
966 890 -
-
-
966 890 72 986
64 174 756
966 890
5 859 428
-
71 001 074
As of 31 December 2009 and 31 December 2008 trading assets of the Bank include derivatives designated as hedging instruments. As of 31 December 2009 and 31 December 2008 the financial guarantees are measured at the higher of (i) the amount of the premium initially recognised and amortised on a straight-line basis and (ii) the amount representing the best estimate of the payment required when a payment becomes probable.
63
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 30
Related Party Transactions
Parties are generally considered to be related if the parties are under common control or one party has the ability to control the other party or can exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. At 31 December 2009 and at 31 December 2008, the outstanding balances with related parties were as follows:
In thousands of Russian Roubles Cash and cash equivalents (contractual interest rate: 2009: 0.3% - 4.6%, 2008: 0.2% - 30%)
2009 Parent Bank Entities of BNP Paribas Group
2008 Parent bank Entities of BNP Paribas Group
1 730 185
270 595
7 101 869
8 640 314
Due from other banks (contractual interest rate: 2009: 0.3% - 8.1%; 2008: 5.1% 19.7%)
756 572
606 148
209 705
882 548
Positive fair value of foreign exchange derivatives
525 125
136
279 152
23 026
Negative fair value of foreign exchange derivatives
(261 058)
-
(614 152)
(1 916)
Positive fair value of interest rate swaps
168 264
-
24 272
-
Negative fair value of Interest rate swaps
(383 068)
-
(92 953)
-
Positive fair value of options
43 575
-
950 591
-
Negative fair value of options
(25 751)
-
Other financial assets
195 105
-
65 316
-
-
9 206
-
116
12 098 075
2 471 998
28 191 768
787 410
-
84 883
-
214 261
1 663 431
-
1 616 049
-
-
9 710
-
8 880
14 375
-
17 915
-
10 975 502
43 516
32 300 268
716 976
(10 711 435)
(43 380)
(32 635 268)
(695 866)
Other assets Due to other banks (contractual interest rate: 2009: 0.6% – 15.5%, 2008: 0.5% – 39.5%) Customer Accounts (contractual interest rate: 2009: 0.0%; 2008: 0.0%) Subordinated debt (contractual interest rate: 2009: 2.5-3.0%; 2008: 2.5-3.0%) Other financial liabilities Other liabilities Currency receivable on forward contracts Currency payable on forward contracts
(3 507 724)
-
64
BNP Paribas Bank Notes to the Financial Statements – 31 December 2009 30
Related Party Transactions (Continued)
The income and expense items with related parties for 2009 and 2008 were, as follows:
In thousands of Russian Roubles
2009 Parent Bank Entities of BNP Paribas Group
2008 Parent Bank Entities of BNP Paribas Group
Interest income
84 047
115 445
Interest expense
(459 127)
(189 587)
(1 100 641)
(56 774)
(77 416)
(1 493 812)
72 480
Losses less gains from financial derivative instruments
1 307 461
53 848
Fee and commission income
213 359
91 256
68 844
Fee and commission expense
(46 199)
(247 404)
(303 425)
Administrative and other operating expenses
(31 112)
-
105 192
635 (10 063)
(65 119)
-
At 31 December 2009 and 2008, other rights and obligations with related parties were, as follows:
In thousands of Russian Roubles
2009 Parent Bank Entities of BNP Paribas Group
2008 Parent Bank Entities of BNP Paribas Group
Export letters of credit issued by the Bank at the year end
-
-
-
335 521
Guarantees issued by the Bank at the year end
-
472 382
-
470 541
10 273 850
1 969 260
33 750 138
1 072 811
Guarantees received by the Bank in course of lending operations at the year end
Aggregate amounts lent to and repaid by related parties during 2009 and 2008 were:
In thousands of Russian Roubles
2009 Parent Bank Entities of BNP Paribas Group
2008 Parent Bank Entities of BNP Paribas Group
Amounts lent to related parties during the period
2 169 964 928
115 861 198
367 495 150
584 615 883
Amounts repaid by related parties during the period
(2 174 597 375)
(124 467 460)
(357 200 018)
(575 245 758)
30 826 995
77 812 556
481 346 498
133 164 716
(41 516 589)
(76 464 030)
(474 574 806)
(133 484 912)
Amounts lent by related parties during the period Amounts repaid to related parties during the period
As of 31 December 2009 and 2008 the Bank’s immediate and ultimate parent company was BNP Paribas S.A., France. In 2009 the remuneration of key management of the Bank comprising salaries, bonuses and related contributions was RR 210 471 thousand (2008: RR 79 734 thousand).
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