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Annual Business Report

In: Business and Management

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Ìöíäÿðèæàò / Contents
Ìöøàùèäÿ Øóðàñû Ñÿäðèíèí ìöðàæèÿòè Letter of the Chairman of Supervisory Board Èäàðÿ Ùåéÿòè Ñÿäðèíèí ìöðàæèÿòè Letter of the Chairperson of Executive Board 2008-æè èëäÿ Àçÿðáàéæàí èãòèñàäèééàòû Economy of Azerbaijan in 2008 2008-æè èëäÿ Àçÿðáàéæàí áàíê ñåêòîðó Banking sector of Azerbaijan in 2008 Áàíê Ðåñïóáëèêà ùàããûíäà öìóìè ìÿëóìàò General information about Bank Respublika 2008-æè èëäÿ Áàíêûí ÿñàñ ìàëèééÿ ýþñòÿðèæèëÿðè Main financial indicators of the Bank in 2008 Êðåäèò ñèéàñÿòè Loan policy Ðèñêëÿðèí èäàðÿ åäèëìÿñè Risk management Áåéíÿëõàëã ÿìÿêäàøëûã International cooperation Ìöøòÿðè õèäìÿòè âÿ ìöøòÿðèëÿðëÿ ÿëàãÿëÿð Customer service and customer relations Ìàðêåòèíã ôÿàëèééÿòè Marketing activity Èíñàí ðåñóðñëàðû Human resources Тюрflмfl ширкflтлflр Subsidiaries Консолидасийа олунмуш малиййfl щесабатлары Consolidated Financial Statements

5 7 9 13 17 21 27 31 35 39 43 47 51 55

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Èëëèê ùåñàáàò / Annual report

Ùþðìÿòëè õàíûìëàð âÿ æÿíàáëàð,
2008-жи или Азflрбайжанын сосиал-игтисади щflйатында, банк секторунун вfl Банк Республика-нын инкишафында даща бир flламflтдар ил кими гейд етмflк олар. Ил flрзиндfl юлкflдfl Цмуми Дахили Мflщсулун реал щflжми 10,8%, банк секторунун цмуми активлflри исfl 52,8% артмышдыр. Дцнйадакы игтисади бющрана бахмайараг бу эюстflрижилflр Азflрбайжан игтисадиййатынын вfl банк секторунун инкишафыны эюстflрир. Юлкflдfl апарыжы банклардан олан Банк Республика 2008-жи илдfl инкишафыны давам етмишдир вfl бир чох малиййfl эюстflрижилflри цзрfl йцксflк артыма наил олмушдур. Банкын цмуми активлflринин ил flрзиндfl артымы исfl 55,8% олмушдур. 2008-жи илдfl flщflмиййflтли артым нflтижflсиндfl Банкын цмуми капиталы 41,2 млн. АЗН, сflщмдар капиталы исfl 22,6 млн. АЗН тflшкил етмишдир. Алманийанын КфW банк групунун цзвц ДЕЭ вfl Спаркассен-Финанзэруппе цзвц СЫДТ flввflлки иллflрдfl олдуьу кими “25% + 1 сflщм” пакети илfl Банкын сflщмдарлары сырасында тflмсил олунурлар. Моодй’с Ынвесторс Сервиже аэентлийи 2008-жи илин нойабр айында Банкын Б2 рейтингини “стабил” прогнозу илfl тflсдиглflмишдир, бу исfl Банк Республика-нын етибарлылыг сflвиййflсини flкс етдирир. Банк Республика 2008-жи илдfl бейнflлхалг малиййfl тflшкилатлары илfl flмflкдашлыьы даща да эенишлflндирмишдир. Банк Республика flнflнflви олараг мцштflри хидмflтинин давамлы инкишафына бюйцк юнflм верир. 2008-жи илдfl Банк мцштflрилflрfl бир сыра йени мflщсул вfl хидмflтлflр тflгдим етмишдир. Банк Республика ил flрзиндfl йени филиаллар ачмышдыр вfl щазырда юлкfl цзрfl 32 офисдflн ибарflт мцштflри хидмflти шflбflкflсинfl маликдир. 2008-жи илин уьурлу нflтижflлflри илfl Банкын Сflщмдарларыны, Ямflкдашларыны, Мцштflрилflрини вfl Тflрflфдашларыны тflбрик едирflм вfl эflлflжflк ишлflриндfl онлара йени наилиййflтлflр арзулайырам.
Ùþðìÿòëÿ, Åë÷èí Ãóëèéåâ Ìöøàùèäÿ Øóðàñûíûí Ñÿäðè

Dear ladies and gentlemen,
The year 2008 can be considered another significant year in Azerbaijan’s social and economic life, in the development of the banking sector and Bank Respublika. During the year, the Real Gross Domestic Product increased by 10.8%, while total assets in the banking sectors rose by 52.8%. These indices reflect the development of Azerbaijan’s economy and banking sector despite the global economic crisis. Bank Respublika, one of the leading banks in Azerbaijan, continued its development in 2008 and saw a sharp growth in a number of its financial indices. In the course of the year, the Bank’s total assets rose by 55.8%. Due to the significant growth in 2008, the Bank’s total equity reached 41.2 million AZN, while the share capital was 22.6 million AZN. Like in the previous years, DEG, a member of the German KfW group, and SIDT, a member of Sparkassen-Finanzgruppe, remained shareholders of the Bank, with a participation interest of “25% + 1 share” . In November 2008, Moody’s Investors Service confirmed the Bank’s rating at B2, outlook stable, which is indicative of Bank Respublika’s reliability. In 2008, Bank Respublika further enhanced its relations with international financial institutions. Bank Respublika, as always, pays particular attention to the development of its customer service. In 2008, Bank Respublika introduced a number of products and services to its customers. During the year, Bank Respublika opened a number of new branches and its customer network currently consists of 32 offices. I congratulate the Bank’s Shareholders, Employees, Customers and Partners on the successful results of the year 2008 and wish them further success in the future.
Yours faithfully, Elchin Guliyev Chairman of the Supervisory Board

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Èëëèê ùåñàáàò / Annual report

Ùþðìÿòëè õàíûìëàð âÿ æÿíàáëàð,
2008-жи илдfl Азflрбайжан игтисадиййаты, елflжfl дfl банк сектору сон иллflрдflки йцксflк инкишаф динамикасыны давам етдирмflйfl наил олмушдур. Банк Республика цчцн дfl 2008-жи ил уьурлу олмушдур. Банкын фflалиййflтинин flсас эюстflрижилflри олан активлflр, кредит портфели вfl мцштflри депозитлflри ил flрзиндfl мцвафиг олараг 55,8%, 59,7% вfl 23,4% артмышдыр. Банк Республика-нын 2008-жи илдfl халис мflнфflflти 10,4 млн. АЗН, халис мflнфflflтин активлflрfl нисбflти (РоА) 2,69%, цмуми капитала нисбflти исfl (РоЕ) 25,35% олмушдур. Бу эюстflрижилflр Банкын уьурлу фflалиййflтини flкс етдирир. 2008-жи илдfl Банк Республика Раиффеисен Зентралбанк Юестерреижщ АЭ илfl Азflрбайжанын юзflл банк секторунун тарихиндfl 50 млн. АБШ доллары мflблflьиндfl flн ири кредит мцгавилflси имзаламышдыр. Банк Республика илин сонунда Авропа Йенидflнгурма вfl Инкишаф Банкы (АЙИБ) вfl ДЕЭ Инвестисийа Ширкflти илfl цмумиликдfl 22,5 млн. АБШ доллары мflблflьиндfl кредит мцгавилflлflри дfl баьламышдыр. 2008-жи илин йекунларына flсасflн Банк Республика АЙИБ-ин “Тижарflтин малиййflлflшдирилмflси цзрfl Азflрбайжанда flн фflал банк” мцкафатыны алмышдыр. Моодй’с Ынвесторс Сервиже аэентлийинин 2008-жи илин нойабр айында Банк Республика-нын Б2 рейтингини “стабил” прогнозу илfl тflсдиглflмflси дfl мцщцм flщflмиййflтfl маликдир. Банк Республика-нын приоритетлflриндflн бири дfl хидмflт шflбflкflсинин эенишлflндирилмflсидир. Банкын щазырда 32 филиалы вfl шюбflси фflалиййflт эюстflрир, бунлардан 8 филиал вfl шюбfl 2008-жи ил flрзиндfl ачылмышдыр. 2008-жи илдfl бирэfl ишfl эюрfl Банкын Сflщмдарларына вfl Ямflкдашларына, Мцштflрилflринfl вfl Тflрflфдашларына тflшflккцр едирflм, flлдfl едилмиш наилиййflтлflрлfl онлары тflбрик едирflм вfl йени уьурлар арзу едирflм.
Сflмимиййflтлfl, Хядижя Щясянова Идаря Щейятинин Сядри

Dear ladies and gentlemen,
In 2008, Azerbaijan’s economy, including the banking sector, retained the high growth rate of development that had been seen in the previous years. The year 2008 was successful for Bank Respublika, too. The key indices of the Bank’s activities – its assets, loan portfolio and customer deposits – rose during the year by 55.6%, 59.7% and 23.4%, respectively. The Bank’s net profit in 2008 was 10.4 million AZN. The Return on Assets ratio (ROA) was 2.69%, while the Return on Equity ratio (RoE) was 25.35%.These indices reflect the Bank’s successful development in 2008. In 2008, Bank Respublika and Raiffeisen Zentralbank Юesterreich AG entered into the largest loan agreement in the history of the private banking sector in Azerbaijan, with a value of 50 million US dollars. In the end of the year, Bank Respublika entered into loan agreements with the European Bank for Reconstruction and Development (EBRD) and DEG Investment Company, with a total value of 22.5 million US dollars. Based on the results of the year 2008, Bank Respublika was named “ zerbaijan's most active A trade financing bank” by the EBRD. The fact that Moody’s Investors Service confirmed the Bank’s rating at B2 with a stable outlook in November 2008 is also of particular significance. One of the priorities of Bank Respublika is the expansion of its customer service network. At present, Bank Respublika has 32 branches and service points, 8 of which were opened in 2008. I thank all of the Bank’s Shareholders, Employees, Customers and Partners for our successful teamwork in 2008, congratulate them on our accomplishments and wish them further success in the future.
Sincerely, Khadija Hasanova Chairperson of the Executive Board

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Èëëèê ùåñàáàò / Annual report

Áàíêûí Èäàðÿ Ùåéÿòè Executive Board of the Bank 1. Àñëàí Àáàñîâ, Ñÿäð Ìöàâèíè Àñëàí Àáàñîâ, Äåïóòé Æùàèðìàí 2. Àãøèí ßìèðîâ, Öçâ Àýñùèí Àìèðîâ, Ìåìáåð 3. Õÿäèæÿ Ùÿñÿíîâà, Ñÿäð Êùàäèúà Ùàñàíîâà, Æùàèðïåðñîí 4. Ðàôàåë Ãàñûìîâ, Ñÿäð Ìöàâèíè Ðàôàåë Ýàñèìîâ, Äåïóòé Æùàèðìàí 5. Àñÿô Íàìàçîâ, Ñÿäðèí 1-æè Ìöàâèíè Àñàô Íàìàçîâ, Ôèðñò Äåïóòé Æùàèðìàí

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2008-жи илдя Азярбайжан игтисадиййаты / Economy of Azerbaijan in 2008

2008-жи ил Азflрбайжан игтисадиййаты цчцн нювбflти уьурлу ил олмушдур. Дцнйадакы игтисади вflзиййflтfl бахмайараг юлкflнин Цмуми Дахили Мflщсулунун реал щflжми 2008-жи илдfl 10,8% артараг 38 млрд. АЗН мflблflьини кечмиш, адамбашына дцшflн ЦДМ щflжми исfl 4440 АЗН олмушдур. Öìóìè Äàõèëè Ìÿùñóë (ìëðä. ÀÇÍ) Gross Domestic Product (bln. AZN)
38.0

The year 2008 was another successful year for Azerbaijan’s economy. Despite the economic situation in the world, the actual amount of the Gross Domestic Product increased by 10.8%, exceeding 38 billion AZN, while the GDP per capita was 4440 AZN. ÖÄÌ-уí ðåàë àðòûìû Real growth rate of GDP
34.5% 26.4% 25.0%

25.2 17 .7 11.9 10.8%

2005

2006

2007

2008

2005

2006

2007

2008

Яввflлки иллflрдfl ЦДМ-ун йцксflк артымы даща чох нефт секторунун сцрflтли артымы илfl баьлы олмушдурса, 2008-жи илдfl гейри-нефт секторунда даща йцксflк артым flлдfl едилмишдир. Белfl ки, нефт секторунда 2008-жи илдfl 7%, гейри-нефт секторунда исfl 15,7% артым олмушдур. Ýþñòÿðèæèëÿð / Indicators Èñòåùëàê ãèéìÿòëÿðèíèí àðòûìû (%) Consumer price change (%) ÀÇÍ-èí ÓÑÄ-éÿ îðòà èëëèê íèñáÿòè Average AZN rates to USD Îðòà àéëûã ÿìÿê ùàããûíûí èëëèê àðòûìû (%) Average monthly wage growth (%) Áöäæÿ ýÿëèðëÿðèíèí èëëèê àðòûìû (%) Budget revenues annual growth (%) Áöäæÿ êÿñðè / ïðîôèsèòè (ÖÄÌ öçðÿ %) Budget deficit / ïðîôècèò (% from GDP) Äþâëÿò áîðæó (ÖÄÌ öçðÿ %) Gross governmental debt (% from GDP) Âàëéóòà åùòèéàòëàðû (ìëðä. ÓÑÄ) Currency reserves (bln. USD)

While the GDP growth in the previous years was largely linked to the rapid development in the oil sector, 2008 was market by relatively higher growth in the non-oil sector. For instance, while the growth rate in the oil sector in 2008 was 7%, in the non-oil sector it was 15.7%. 2005 9.6 0.95 21.9 26.4 –0.7 12.6 2.4 2006 8.3 0.89 19.8 88.8 +0.5 11 .0 3.4 2007 16.7 0.85 42.0 155.3 +0.2 8.2 4.2 2008 20.8 0.805 24.2 179.2 -0.03 6.4 17 .4

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Èëëèê ùåñàáàò / Annual report

2008-жи илдя Азярбайжан игтисадиййаты / Economy of Azerbaijan in 2008

Бейнflлхалг консорсиумлар чflрчивflсиндfl Азflрбайжанын нефт-газ йатагларынын ишлflнмflси, Бакы-Тбилиси-Жейщан вfl Бакы-Тбилиси-Ярзурум кflмflрлflри илfl артан нефт вfl газ ихражы, ТРАЖЕЖА вfl Шимал-Жflнуб бейнflлхалг нflглиййат лайищflлflри, щазырда тикинтиси апарылан Бакы-Тбилиси-Гарс дflмирйолу, НАБУЖЖО газ кflмflри лайищflси вfl диэflр бейнflлхалг енеръи вfl нflглиййат лайищflлflри Азflрбайжанын дцнйада мювгелflрини даща да эцжлflндирмишдир. Бу бейнflлхалг лайищflлflр вfl артан нефт эflлирлflри Азflрбайжанда вfl елflжfl дfl бцтцн реэионда сабитлийин вfl инкишафын мцщцм амилинfl чеврилмишдир. Юлкflдfl гейри-нефт секторунун, сащибкарлыьын, реэионларын, игтисадиййатын мцхтflлиф сащflлflринин инкишафы илfl баьлы 2008жи илдfl бир чох програмларын вfl лайищflлflрин щflйата кечирилмflси давам етдирилмишдир. Бизнес вfl инвестисийа мцщитинин юлкflдfl даща да йахшылашдырылмасы истигамflтиндfl дfl бир сыра мцщцм наилиййflтлflр flлдfl едилмишдир. 2008-жи илдfl юзflл сектор даща да инкишаф етмишдир вfl онун ЦДМда пайы 84,5% олмушдур. Азflрбайжанын валйута ещтийатлары 2008-жи илдfl даща да артараг илин сонуна 18,6 млрд. АБШ доллары тflшкил етмишдир, бу да дцнйада щазыркы игтисади вflзиййflт шflраитиндfl юлкfl игтисадиййатынын вfl малиййfl системинин сабитлийи вfl инкишафы цчцн мцщцм flщflмиййflтfl маликдир. Юлкfl игтисадиййатына сflрмайflлflрин щflжми 2008-жи илдfl 34,3% артмышдыр. Бунунла йанашы Азflрбайжан ширкflтлflринин харижи юлкflлflрfl, хцсусилfl, гоншу юлкflлflрfl сflрмайflлflринин щflжми дfl артмышдыр, бу исfl юлкflнин артан игтисади потенсиалыны эюстflрир. 2008-жи илдfl Азflрбайжан 140 юлкfl илfl 38,2 млрд. АБШ доллары мflблflьиндfl тижарflт flмflлиййатлары апармышдыр. Ил flрзиндfl ихражын щflжми 1,4 дflфfl 30,6 млрд. АБШ доллары, идхалын щflжми исfl 19,1% артараг 7 млрд. АБШ доллары олмушдур. ,6 Юлкfl игтисадиййатынын инкишафы истигамflтиндfl эюрцлflн ишлflр вfl flлдfl олунан наилиййflтлflр нflтижflсиндfl Азflрбайжан реэионун игтисади мflркflзинfl чеврилмишдир.

The development of Azerbaijan's oil and gas fields within international consortia, growing oil and gas export through Baku-Tbilisi-Ceyhan and Baku-Tbilisi-Erzurum pipelines, TRACECA and North-South international transportation projects, Baku-Tbilisi-Kars railroad that is currently under construction, NABUCCO pipeline project and other energy and transportation projects have strengthened Azerbaijan’s positions in the world. These projects, as well as the increasing oil profits, have become an important factor ensuring stability both in Azerbaijan and in the entire region. The implementation of various programs and projects related to the development of the non-oil sector, entrepreneurship, regions, various areas of economy continued in 2008. A number of goals that were achieved in the country will further improve business and investment environment. 2008 saw further development of the private sector and its share in the GDP totaled 84.5%. Azerbaijan’s currency reserves continued to grow in 2008, totaling 18.6 billion USD by the end of the year, which is very important for the stability and development of country’s economy and financial systems, given the current economic situation in the world. In 2008, the amount of investment in the country’s economy grew by 34.3%. Local company investments abroad, particularly to the neighboring countries also grew, demonstrating the country's increased economic potential. In 2008, Azerbaijan realized trade operations with 140 countries worth USD 38.2 billion. Export volume increased 1.4 times, reaching USD 30.6 billion, while import grew by 19.1%, totaling 7 USD. .6 With the work carried out in the area of economic development and the achievements thus accomplished, Azerbaijan has become the economic center of the region.

Èëëèê ùåñàáàò / Annual report

12

2008-жи илдя Азярбайжан банк сектору / Banking sector of Azerbaijan in 2008

2008-жи ил юлкflнин банк сектору цчцн уьурлу олмушдур. Илин сонуна юлкflдfl 46 коммерсийа банкы фflалиййflтдfl олуб: 45 юзflл вfl 1 гисмflн дювлflт банкы. Банкларын капиталы 2008-жи илдfl 55,2% артмышдыр, 1 банка орта щесабла дцшflн капиталын щflжми исfl 37 млн. АЗН олмушдур. ,1 Öìóìè àêòèâëÿð (ìëí. ÀÇÍ) Total assets (mln. AZN)
10273

2008 was a successful year for the banking sector of Azerbaijan. A total of 46 commercial banks were operating as of the end of the year, including 1 partially state-run and 45 private banks. The banks' capital increased by 55.2%, and the average capital per bank was 37 million AZN. .1 Öìóìè êðåäèò ïîðòôåëè (ìëí. ÀÇÍ) Total credit portfolio (mln. AZN)
6817

6726

4394

3778 2252 1441

2363

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2008

2005

2006

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2008

Банкларын активлflри 2008-жи илдfl 52,8% артмышдыр, онларын ЦДМ-а нисбflти исfl 27% олмушдур. Бу, банк секторунун инкишафы цчцн потенсиалы эюстflрир. Банк сектору цзрfl кредитлflрин щflжми ил flрзиндfl 55,1% артмышдыр. Банкларда мцштflри депозитлflри 2008-жи илдfl 18% артараг 4055,1 млн. АЗН олмушдур, бунун 44,5%-и манатла, 55,5%-и исfl харижи валйутада олан депозитлflридир. Азflрбайжан Милли Банкы тflрflфиндflн пул сийасflтиндfl едилflн привентив тflдбирлflр юлкflнин банк системинин дцнйадакы малиййfl бющранындан горунмасына шflраит йаратмышдыр. Юлкfl банклары 2008-жи илдfl Авропа Йенидflнгурма вfl Инкишаф Банкы, Асийа Инкишаф Банкы, Бейнflлхалг Малиййfl Корпорасийасы, КфW Банк Групу, ФМО вfl диэflр бейнflлхалг малиййfl тflшкилатлары илfl кредит хflтлflри вfl капитала сflрмайfl цзрfl flмflкдашлыьы эенишлflндирмишлflр. Юлкfl рflщбflрлийинин, Азflрбайжан Республикасы Милли Банкынын вfl коммерсийа банкларынын фflалиййflти Азflрбайжан банк секторунун инкишафынын давам едflжflйинfl flсас верир.

The banks' assets increased by 52.8% and their ratio to GDP was 27%, giving evidence of the growth potential of the banking sector. The amount of credits in banking sector has increased by 55.1% over the reported period. Customer deposits increased by 18% up to AZN 4,055.1 million, including 44.5% of AZN deposits, and 55.5 % of foreign currency deposits. A series of preventive measures implemented by the National Bank of Azerbaijan as a part of monetary policy, has saved the national banking system from effects of the world financial crisis. In 2008, Azerbaijan banks expanded their cooperation on the establishment of credit lines and capital investing with the European Bank for Reconstruction and Development, Asian Development Bank, International Finance Corporation, KfW Banking group, FMO and other international financial organizations. The activities of the country's authorities, the National Bank of Azerbaijan, and the commercial banks ensure that the development of the banking sector in Azerbaijan will continue in the coming years.

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Èëëèê ùåñàáàò / Annual report

Банк Республика щаггында цмуми мялумат / Ýåíåðàë èíôîðìàòèîí àáîóò Áàíê Ðåñïóáëèêà

Банкын йаранмасы Банк Республика 22 май 1992-жи ил тарихдflн етибарflн Азflрбайжан Республикасы Милли Банкынын лисензийасы flсасында фflалиййflтдflдир. Банкын сящмдарлары Йерли сflщмдарлар Алманийанын малиййfl тflшкилатлары – ДЕЭ Инвестисийа Ширкflти (КфW банк групунун цзвц) – СЫДТ (Спаркассен-Финанзэруппе малиййfl групунун цзвц) Банкын бейнялхалг рейтинги Банк Республика Моодй’с Ынвесторс Сервиже аэентлийинин Б2 дflрflжflли “стабил” прогнозлу узунмцддflтли рейтингинfl маликдир. Бу рейтинг Азflрбайжанын юзflл банк секторунда flн йцксflк рейтинглflрдflндир. Банкын ясас малиййя эюстярижиляри (31 декабр 2008-жи ил тарихинfl) Цмуми активлflр Мцштflрилflрfl верилмиш кредитлflр Мцштflрилflрин депозитлflри Цмуми капитал Банкын хидмят шябякяси (31 декабр 2008-жи ил тарихинfl) Банк Республика-нын мцштflри хидмflти шflбflкflси Бакы, Эflнжfl, Сумгайыт, Минэflчевир, Ширван, Шflки, Губа, Хачмаз, Лflнкflран, Астара, Масаллы, Йевлах, Бflрдfl, Шflмкир, Эюйчай вfl Эоранбой шflщflрлflриндfl фflалиййflт эюстflрflн 32 филиал вfl шюбflдflн ибарflтдир. 388,6 млн. АЗН 252,5 млн. АЗН 137 млн. АЗН ,8 41,2 млн. АЗН 75% 25% + 1 сflщм 16,67% 8,33%

Establishment of the Bank Bank Respublika started its operations on 22 May 1992, on the basis of a license issued by the National Bank of the Republic of Azerbaijan. Shareholders of the Bank Local shareholders Financial organizations of Germany – DEG Investment Company (KfW banking group member) – SIDT (Sparkassen-Finanzgruppe financial group member) International rating of the Bank Bank Respublika's long-term rating, as assigned by Moody's Investors Service, is B2, with a ‘stable’ outlook. The Bank's rating is one of the highest in Azerbaijan private banking sector. Main financial indicators (as of December 31, 2008) Total assets Loans to customers Customer deposits Total equity Service network (as of December 31, 2008) The Bank's customer service network consists of 32 branches and service points operating in Baku, Ganja, Sumgayit, Mingechevir, Shirvan, Sheki, Guba, Khachmaz, Lenkeran, Astara, Masalli, Yevlakh, Barda, Shamkir, Goychay and Goranboy. 388.6 млн. АЗН 252.5 млн. АЗН 137 млн. АЗН .8 41.2 млн. АЗН 75% 25% + 1 сflщм 16.67% 8.33%

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Èëëèê ùåñàáàò / Annual report

Банк Республика щаггында цмуми мялумат / Ýåíåðàë èíôîðìàòèîí àáîóò Áàíê Ðåñïóáëèêà

Банкын тюрямя ширкятляри Банк Республика гиймflтли каьызлар базарында фflалиййflт эюстflрflн вfl Бакы Фонд Биръасынын сflщмдары олан “Республика Инвест” ММЖ-нин тflсисчиси вfl “Бакы Сыьорта” ширкflтинин flсас сflщмдарыдыр. Банкын ямякдашларын сайы (31 декабр 2008-жи ил тарихинfl) 480 нflфflр Банкын Мцшащидя Шурасы • • • • • Елчин Гулийев Наил Шащвердийев Мурад Рflщимов Реинщард Боллманн (ДЕЭ) Карстен Штефан (СЫДТ) Сflдр Цзв Цзв Цзв Цзв

Subsidiaries of the Bank Bank Respublika established "Respublika Invest" that operates on the securities market and is a shareholder of Baku Stock Exchange; the Bank is also the main shareholder of Baki Sigorta insurance company. Number of the Bank's employees (as of December 31, 2008) 480 Supervisory Board of the Bank • • • • • Elchin Guliyev Nail Shahverdiyev Murad Rahimov Ðåèíùàðä Áîëëìàíí (ÄÅÝ) Carsten Steffan (ÑÛÄÒ) Chairman Member Member Member Member

Банкын Идаря Щейяти • • • • • Хflдижfl Щflсflнова Асflф Намазов Рафаел Гасымов Аслан Абасов Агшин Ямиров Сflдр Сflдрин 1-жи Мцавини Сflдр Мцавини Сflдр Мцавини Цзв

Executive Board of the Bank • • • • • Khadija Hasanova Asaf Namazov Rafael Gasimov Aslan Abasov Agshin Amirov Chairperson First Deputy Chairman Deputy Chairman Deputy Chairman Member

Èëëèê ùåñàáàò / Annual report

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2008-жи илдя Банкын ясас малиййя эюстярижиляри / Main financial indicators of the Bank in 2008

Банк Республика 2008-жи илдfl малиййfl эюстflрижилflри цзрfl flщflмиййflтли артыма наил олмагла, Азflрбайжанда апарыжы банклар сырасында юз мювгейини сахламышдыр. Дцнйадакы игтисади бющрана бахмайараг Банк Республика-нын 2008-жи илдfl малиййfl эюстflрижилflринин артымы мцщцм flщflмиййflтfl маликдир вfl Банкын ил flрзиндfl уьурлу фflалиййflтини flкс етдирир. Активляр Банк Республика-нын цмуми активлflри 2008-жи илдfl 55,8% артмышдыр вfl илин сонуна 388,6 млн. АЗН олмушдур. Áàíêûí àêòèâëÿðè (ìëí. ÀÇÍ) Assets of the Bank (mln. AZN)
388.6

By attaining a substantial increase in its financial highlights in 2008, Bank Respublika kept its position among Azerbaijan's leading banks. The fact that the Bank’s financial indicators continued to grow in 2008 despite the global economic crisis is of great significance and reflects the Bank’s successful operations in that year. Assets In 2008, Bank Respublika's total assets increased by 55.8%, totaling 388.6 million AZN. Àêòèâëÿðèí èëëèê àðòûì òåìïè, % Annual growth rate of the assets, %
124% 94% 78% 68% 53% 55.8%

89% 249.5

111.3 57 .4

35%

2005

2006

2007

2008

2005

2006

2007

2008

Банк Республика-нын банк сектору цзрfl цмуми активлflрдfl пайы 2007-жи илдfl 3,7% олмушдурса, 2008-жи илин йекунларына flсасflн 3,8% тflшкил етмишдир. Банк Республика-нын активлflринин 65% щиссflси илин йекунларына flсасflн мцштflрилflрfl верилмиш кредитлflр тflшкил едир. Банкын кредит портфелинин щflжми 2008-жи илдfl 59,7% артмышдыр. Банк Республика-нын банк сектору цзрfl кредит портфелиндfl пайы 2007-жи илдfl 3,4% олмушдурса, 2008-жи илин сонуна бу эюстflрижи 3,8% тflшкил етмишдир. Банкын кредит сийасflти щаггында flтрафлы мflлумат Щесабатын “Кредит сийасflти” бюлмflсиндfl верилир.

While in 2007 Bank Respublika's share in the total assets , of the banking sector was 3.7%, in 2008, according to the year's financial results, this figure reached 3.8%. The 2008 results also show that 65% of Bank Respublika's total assets were accounted for by customer loans, reflecting a 59.7% increase in the Bank's loan portfolio. While Bank Respublika's share in the total loan portfolio in the banking sector was 3.4% in 2007 in 2008 this , figure reached 3.8%. More detailed information on the Bank's loan policy is provided in the 'Loan Policy' section of this Report.

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Èëëèê ùåñàáàò / Annual report

2008-жи илдя Банкын ясас малиййя эюстярижиляри / Main financial indicators of the Bank in 2008

Áàíêûí êðåäèò ïîðòôåëè (ìëí. ÀÇÍ) Loan portfolio of the Bank (mln. AZN)
252.5

Êðåäèò ïîðòôåëèíèí èëëèê àðòûì òåìïè, % Annual growth rate of loan portfolio, %

140% 106% 110%

158.0 71% 75.4 31.4 46% 64% 55% 59.7%

2005

2006

2007

2008

2005

2006

2007

2008

Пассивляр 2008-жи илдfl Банк Республика-нын уьурлу фflалиййflтинин даща бир эюстflрижиси мцштflри депозитлflринин 23,4% артмасыдыр. Мцштflри депозитлflринин артымы мцштflрилflрин Банка олан етимадыны вfl елflжfl дfl бу истигамflтдfl Банкын уьурлу ишини flкс етдирир. Ìöøòÿðèëÿðèí äåïîçèòëÿðè (ìëí. ÀÇÍ) Customer deposits (mln. AZN)
137 .8 111.7

Liabilities and equity Another sign of Bank Respublika’s successful operations in 2008 is a 23.4% increase in customer deposits. This increase in customer deposits reflects the customers' trust towards the Bank, and its successful performance in this area. Ìöøòÿðèëÿðèí äåïîçèòëÿðèíèí èëëèê àðòûì òåìïè, % Annual growth rate of customer deposits, %
134% 113%

76% 65% 52.4 22.4 26% 50%

18% 23.4% 2006 2007 2008

2005

2006

2007

2008

2005

Банк Республика-нын банк сектору цзрfl мцштflри депозитлflриндfl пайы 2007-жи илдfl 3,3% олмушдурса, 2008-жи илин йекунларына flсасflн 3,4% тflшкил етмишдир. 2008-жи ил Банк Республика цчцн харижи вfl бейнflлхалг малиййfl тflшкилатларындан вflсаитлflрин жflлб едилмflси бахымындан да уьурлу ил сайылыр. Банкын истифадfl етдийи кредит хflтлflри вfl

While in 2007 Bank Respublika's share in the total customer deposits in the banking sector was 3.3%, in 2008 this figure reached 3.4%. In 2008, Bank Respublika was also successful in raising funds from foreign and international financial organizations. A more detailed account of the credit lines used by the Bank

Èëëèê ùåñàáàò / Annual report

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2008-жи илдя Банкын ясас малиййя эюстярижиляри / Main financial indicators of the Bank in 2008

баьладыьы йени мцгавилflлflр щаггында flтрафлы мflлумат Щесабатын “Бейнflлхалг Ямflкдашлыг” бюлмflсиндfl верилир. Банк Республика-нын цмуми капиталы 2008-жи илдfl 105,8% артараг 41,2 млн. АЗН мflблflьини кечмишдир. Банкын низамнамfl капиталы ил flрзиндfl 79,5% артараг 22,6 млн. АЗН олмушдур. Алманийанын КфW банк групунун цзвц ДЕЭ вfl Спаркассен-Финанзэруппе цзвц СЫДТ 2005-жи илдflн етибарflн “25% + 1 сflщм” пакети илfl Банкын сflщмдарларыдыр. Мянфяят 2008-жи илин йекунларына flсасflн Банк Республика-нын эflлирлflри 111,1% артараг 67 ,621 млн. АЗН олмушдур. Цмуми эflлирлflрдfl фаиз эflлирлflринин пайы 71%, flмflлиййат эflлирлflринин пайы исfl 29% тflшкил етмишдир. 2008-жи ил flрзиндfl Банкын хflржлflри исfl 114% артараг 54,232 млн. АЗН олмушдур. Банкын баланс мflнфflflти 2008-жи илдfl 13,389 млн. АЗН, халис мflнфflflти исfl 10,442 млн. АЗН олмушдур. Банкын 2008-жи илдfl халис мflнфflflти 2007-жи илин йекунлары илfl мцгайисflдfl 105,2% артмышдыр. 2008-жи илдfl Банкын халис мflнфflflтинин активлflрfl нисбflти (РоА) 2,69%, цмуми капитала нисбflти исfl (РоЕ) 25,35% тflшкил етмишдир. Банкын малиййfl эюстflрижилflринин flщflмиййflтли артымы вfl илин йекунларына flсасflн flлдfl олунан мflнфflflт Банкын 2008-жи илдfl уьурлу фflалиййflтини flкс етдирир.

and of the new agreements the Bank entered into is provided in the 'International Cooperation' section of the Report. During 2008, the Bank's total capital increased by 105.8%, exceeding 41.2 million AZN. The Bank's share capital increased by 79.5%, totaling 22.6 million AZN. Since 2005, DEG, a member of the German KfW banking group, and SIDT, a member of Sparkassen-Finanzgruppe, have held a '25% + 1 share' interest in the Bank. Profit According to the 2008 results, Bank Respublika's income grew by 111.1%, totaling 67 ,621 million AZN. Within the total income, the interest and operating incomes were 71% and 29% respectively.The Bank's expenses for the year grew by 114% and amounted to 54,232 million AZN. The Bank's balance-sheet profit in 2008 was 13,389 million AZN, while the net profit was 10,442 million AZN. In comparison to the results of 2008 the Bank’s net profit grew by 105.2%. In 2008, the Return on Assets (RoA) was 2.69%,while the Return on Equity (RoE) was 25.35%. The Bank's financial highlights showed a considerable increase and the profit attained, as shown in the year’s financial results, reflects Bank Respublika’s successful performance in 2008.

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Èëëèê ùåñàáàò / Annual report

Кредит сийасяти / Loan policy

Кредит flмflлиййатлары Банк Республика-нын эflлирлflринин flсас щиссflсини тflмин етдийи цчцн онун фflалиййflтиндfl мцщцм flщflмиййflтfl маликдир. 2008-жи илин йекунларына flсасflн Банкын кредит портфелинин щflжми 252,5 млн. АЗН олмушдур, бу исfl flввflлки илин эюстflрижиси илfl мцгайисflдfl 59,7% чохдур. Кредит портфелинин артымы Банкын бу сащflдfl уьурлу фflалиййflтинин вfl дцзэцн кредит сийасflтинин эюстflрижисидир. Банк Республика-нын кредит сийасflтинин flсас мflгсflди минимал рисклflр чflрчивflсиндfl максимал эflлир flлдfl едилмflси вfl ликвидлийин зflрури сflвиййflдfl сахланылмасы шflрти илfl пул вflсаитлflринин сflмflрflли йерлflшдирилмflсиндflн ибарflтдир. Кредитлflрин верилмflси цчцн приоритет сащflлflр вfl арзу олунмайан истигамflтлflр дfl Банкын кредит сийасflтиндfl flкс олунубдур. Банкын вflзифflлflриндflн бири дfl кредит портфелинин диверсификасийасы вfl оптимал структурунун тflмин едилмflсидир. Бу мflгсflдлfl кредит мflщсуллары, мflблflьлflр, мцддflтлflр, реэионлар, филиаллар, бир мцштflри вfl йа мцштflри групуна верилflн кредитлflр вfl саир мейарлар цзрfl лимитлflр вfl щflдflфлflр мювжуддур. Банк Республика кредитлflри мцхтflлиф нювлflрfl бюлцр: кредитлflшмflнин субйектинfl эюрfl – физики вfl щцгуги шflхслflрfl верилflн кредитлflр; мцддflтfl эюрfl – гысамцддflтли вfl узунмцддflтли кредитлflр; мflблflьfl эюрfl – микро, кичик, орта вfl ири кредитлflр; тflйината эюрfl - истещлак, ипотека вfl бизнес кредитлflри. Банк Республика кредит сащflсиндfl фflалиййflтиндfl дцнйадакы игтисади бющраны да нflзflрfl алыр вfl буна уйьун олараг Банк Республика мцсбflт кредит тарихинfl вfl стабил юдflниш габилиййflтинfl малик жари мцштflрилflрfl flсасflн кредит верир. 2008-жи илдfl кредитлflр цзрfl проседурлар даща да тflкмиллflшдирилмишдир. Кредит мflблflьи, мцштflри тflрflфиндflн илкин мflдахил, эировун гиймflтлflндирилмflси, мониторинглflринин кечирилмflси шflртлflри вfl гайдалары сflртлflшдирилмишдир. Кредит рисклflринин азалдылмасы мflгсflди илfl Банк щазырда кичик вfl орта кредитлflрfl цстцнлцк верир. Кредитлflрин верилмflси заманы щflмчинин Рисклflрин Идарfl Едилмflси вfl Щцгуг департаментлflринин рflйлflри тflлflб олунур. Банкда кредит мцтflхflссислflринин аттестасийасы вfl елflжfl дfl flмflкдашлара кредит flмflлиййатлары цзрfl мцтflмади гайдада тренинглflр кечирилир.

As lending operations account for the principal share of Bank Respublika’s income, they hold a very important place in the Bank’s activities. According to the 2008 results, the Bank’s loan portfolio totalled 252.5 million AZN, which is 59.7% higher than the respective figure for the previous year. The growth rate of the Bank's loan portfolio reflects the Bank’s successful performance and correct loan policy. The key objective of Bank Respublika's loan policy is to obtain maximum profits while minimizing all risks and to ensure the effective allocation of funds while adhering to the condition of maintaining the required level of liquidity. The Bank's loan policy specifies both priority areas and undesirable directions for lending. One of the objectives of the Bank is to diversify the loan portfolio and ensure its optimal structure.Towards that end, amongst the criteria for the granting of loans, limits were set on the loan products, amounts, terms, regions, branches, and loans issued to one customer or a group of customers. The Bank divides loans issued to its customers into various groups: by borrower, into loans issued to individual and legal entities; by term, into short-term and long-term loans; by amount, into micro, small, medium and large loans; and by purpose, into consumer, mortgage and business loans. In its lending operations, Bank Respublika takes into account the global economic crisis and issues loans primarily to those current customers that have a positive credit history and stable creditworthiness. In 2008, lending procedures were further improved. Terms and rules related to loan amounts, initial payments made by customers, collateral evaluation and monitoring procedures were made more rigorous. In order to reduce loan risks, the Bank currently prefers issuing small and medium loans. Loans can only be issued with the approval of the Risk Management Department and Legal Department. The Bank regularly conducts performance appraisals for its loan specialists and holds training to improve their knowledge of lending operations.

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Èëëèê ùåñàáàò / Annual report

Кредит сийасяти / Loan policy

Банкын уьурлу фflалиййflтинин даща бир нflтижflси кредит портфелинин кейфиййflтидир. 2008-жи илин сонуна риск алтында олан кредит портфели Банкын цмуми кредит портфелинин 2,3% щиссflсини тflшкил етмишдир вfl бу Азflрбайжан банк секторунда flн йахшы эюстflрижилflрдflндир. Банк Республика-нын кредит flмflлиййатларында бизнес кредитлflри важиб йер тутур. Банк бизнес кредитлflрини юзцнцн вfl мцхтflлиф малиййfl тflшкилатлары илfl програмлар чflрчивflсиндfl жflлб етдийи вflсаитлflрдflн верир. Банк Республика ипотека кредитлflринfl дfl юнflм верflрflк щазырда 7 ил мцддflтинfl flщалийfl ипотека кредитлflри тflклиф едир. Банк Республика кредитлflшмfl вfl тижарflтин малиййflлflшдирилмflси цзрfl Авропа Йенидflнгурма вfl Инкишаф Банкы, Асийа Инкишаф Банкы, Бейнflлхалг Малиййfl Корпорасийасы, ФМО, ДЕЭ, ОФЫД, Раиффеисен Банк, Стандард Банк Плж. (Лондон), Жоммерзбанк АЭ, Сумитомо Митсуи Банкинэ Жорпоратион, Алман-Азflрбайжан Фонду, Сащибкарлыьа Йардым Милли Фонду, Азflрбайжан Ипотека Фонду вfl диэflр малиййfl тflшкилатлары илfl flмflкдашлыг едир. Бейнflлхалг тflшкилатларла flмflкдашлыг щаггында flтрафлы мflлумат Щесабатын “Бейнflлхалг Ямflкдашлыг” бюлмflсиндfl верилир. Белflликлfl, 2008-жи илдfl дцзэцн кредит фflалиййflти Банкын кредит портфелинин щflжми вfl кейфиййflти цзрfl мцсбflт эюстflрижилflри тflмин етмишдир.

Another important issue covered by the Bank's Loan Policy is the quality of the loan portfolio. By the end of 2008, the loan portfolio at risk constituted 2.3% of the Bank's total loan portfolio, which is one of the best results in Azerbaijan's banking sector. Business lending is one of the important directions in Bank Respublika's activity. The Bank issues business loans from both its own funds and funds obtained in the framework of programs with various financial organizations. Mortgage lending is also a matter of great importance to the Bank and it currently issues 7-year mortgage loans. Bank Respublika cooperates with the European Bank for Reconstruction and Development, Asian Development Bank, International Finance Corporation, FMO, DEG, OFID, Raiffeisen Bank, Standard Bank Plc. (London), Commerzbank AG, Sumitomo Mitsui Banking Corporation, GermanyAzerbaijan Fund, National Fund for Entrepreneurship Support, Azerbaijan Mortgage Fund and other financial organizations on lending and trade financing. A detailed account of this cooperation can be found in the 'International Cooperation' section of the Report. Overall, Bank Respublika’s well-designed loan policy ensured positive indicators in the amount and quality of its loan portfolio in 2008.

Èëëèê ùåñàáàò / Annual report

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Ðèñêëÿðèí èäàðÿ åäèëìÿñè / Risk management

2008-жи ил Рисклflрин Идарfl Едилмflси Департаментинин функсионал инкишафы илfl йадда галмышдыр. Ил flрзиндfl мцхтflлиф истигамflтлflрин инкишафы мflгсflди илfl эениш ишлflр щflйата кечирилмишдир. Скоринг системи Банкда кредит картларынын верилмflси заманы тflтбиг олунан скоринг системи йарадылмышдыр. Бу систем пилот мflрщflлflдfl 3 филиалда тflтбиг олунмагдадыр. Системfl кредит сифаришлflри цзрfl гflрарлар гflбул едflркflн кредит рисклflрини минималлашдыран, мцтflхflссислflрин иш фflалиййflти заманы flмflлиййат рисклflринfl нflзарflти вfl зflрури сflнflдлflрин щазырланмасыны щflйата кечирflн функсийалар йерлflшдирилиб. 2009-жу илдfl скоринг системинин инкишаф етдирилмflси, диэflр кредит мflщсулларынын верилмflси заманы системдflн истифадflнин тflмин олунмасы вfl бцтцн филиалларда истифадflнин реаллашдырылмасы нflзflрдfl тутулур. Банкларарасы кредитляшмядя рейтинг системи Банк Республика-да банкларарасы кредитлflшмfl заманы контраэент банкларын рейтингинин мцflййflн едилмflси цчцн дахили рейтинг системи йарадылмышдыр. Бу сащflдfl Банкын flмflкдашлыг етдийи бцтцн банклар цзрfl flмflлиййат нювцндflн асылы олараг лимитлflр вfl рейтинглflр мцflййflн едилиб. Банкларын рейтинглflринин мцflййflн олунмасы илfl flлагflдар олараг мflлумат базасы йарадылмышдыр вfl бу мflлумат базасы рцбдfl бир дflфfl олараг йенилflнир. Кредит сифаришляринин тящлили Илин сонуна РИД тflрflфиндflн корпоратив кредит сифаришлflринин РИДин иштиракы илfl тflщлили вfl онлар цзрfl гflрарларын гflбулу проседуру щазырланмышдыр. Проседур РИД тflрflфиндflн мцштflрийfl аид рисклflрин тflщлили, гиймflтлflндирилмflси, бейнflлхалг стандартлара вfl Банкын минимал тflлflблflринfl уйьунлуьунун йохланылмасы, йекун гflрарын мцflййflн едилмflси вfl рflйин Банкын Кредит Комитflсинин мцзакирflсинfl тflгдим олунмасыны нflзflрдfl тутур. Тflщлил заманы кредит, еколоъи, сосиал, репутасийа, валйута вfl диэflр рисклflр нflзflрfl алыныр. Бу функсийанын flлавfl олундуьуну нflзflрfl алараг flлавfl flмflкдашларын жflлб олунмасы планлашдырылыр. 2009-жу илин биринжи йарысында кредит сифаришлflринин тflщлили заманы дахили кредит рейтинг системинин тflтбиг олунмасы нflзflрдfl тутулуб.

2008 was marked by the functional development of the Risk Management Department. A large amount of work was carried out during the year to ensure development in a number of areas. Scoring system The Bank developed a scoring system and integrated it into the procedure of issuing all types of loans.The introduction of this system is currently in the pilot stage in 3 branches of the Bank.The functions built into the system include risk minimization when making decisions concerning loan requests, as well as control over operating risks in the work of loan specialists and the preparation of all required documents. The Bank plans to further develop the scoring system in 2009, to ensure that it is used in the provision of other loan products and in all branches of the Bank. Interbank lending rating system Bank Respublika has developed an internal rating system that allows it to determine ratings of contractor banks when conducting interbank lending operations. All banks that collaborate with Bank Respublika have been assigned limits and ratings depending on the type of operations. In conjunction with rating assignment, the Bank also created a separate database that is updated once in a quarter. Evaluation of loan requests Towards the end of the year, the RMD developed the procedure of evaluating corporate loan requests and adopting resolutions with RMD’s participation. In accordance with this procedure, the RMD must analyze and evaluate customer-related risks, ensure that they meet international standards and the Bank’s minimum requirements, draft the final resolution and present its conclusions to the Bank’s Loan Committee. Analysis is conducted with consideration of loan, environmental, social, reputation, currency and other risks. In connection with the addition of these functions, the Bank plans to employ additional staff.The Bank also plans to introduce an internal rating system to the process of loan request analysis in the first half of 2009.

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Èëëèê ùåñàáàò / Annual report

Ðèñêëÿðèí èäàðÿ åäèëìÿñè / Risk management

Дахили кредит рейтинги Дахили рейтинг системиндflн сащибкарлыг фflалиййflти илfl мflшьул олан мцштflрилflрин кредит сифаришлflринин тflщлили заманы истифадfl олунажаг. Тflтбиги заманы факторлары вfl нflтижflлflри нflзflрfl алараг Дахили рейтинг системинин илкин формасы щазырланмышдыр. 2009-жу илин flввflлиндflн етибарflн системдflн практики олараг истифадfl олунмасы нflзflрдfl тутулур. Щесабатлылыг Департаментдfl цмуми Банк фflалиййflтинfl нflзарflти щflйата кечирмflйfl кюмflк едflн щесабатлылыг системи гурулуб. Эцндflлик олараг юзцндfl мцхтflлиф аналитик вfl информасийа характерли мflлуматлары flкс етдирflн – жари вfl прогнозлашдырылан ликвидлик, баланс дflйишикликлflри, йахын эцнлflрдfl банкын юдflйflжflйи ири ющдflликлflр, кредит карты портфелинин кейфиййflтинfl нflзарflт, мювжуд пассивлflр васитflсилfl активлflрин малиййflлflшдирилмflсини вfl саир щесабатлар щазырланыр. Лимитляр системи Кредит портфелинин мцштflрилflрин фflалиййflт сащflлflринfl, игтисади сащflлflрfl вfl кредит мflщсулларына эюрfl диверсификасийасы цчцн лимитлflр системи щазырланмышдыр. Лимитлflр системинfl нflзарflт вfl лимитлflрин позулма щаллары баш вердикдfl онларын гаршысы алынмасы цчцн тflдбирлflр планы да щазырланмышдыр. Рисклярин Идаря Едилмяси Комитяси 2008-жи илдfl РИК-ин 29 ижласы кечирилмишдир. Комитflдfl ашаьыдакы гflрарлар гflбул олунуб: контраэент банкларда ностро щесаб галыглары цзрfl лимитлflр, хflзинfl вfl филиаллар цзрfl касса лимитлflри, flмлакын сыьорта олунмасы вfl банкын ющдflликлflри цзрfl лимитлflр, ликвидлийин минимум сflвиййflси цзрfl лимитлflр, валйута мювгейинин диверсификасийасы цзрfl лимитлflр, банклар цзрfl лимитлflр, мflщсуллар цзрfl лимитлflр вfl саир. 2008-жи илдfl банк юзцнцн чиркли пулларын йуйулмасына гаршы сийасflтини давам етдирмиш вfl бу сащflдfl фflалиййflти эцжлflндирмишдир. Белfl ки, харижи вfl йерли мцхбир банкларла апарылан мцхтflлиф flмflлиййатлара нflзарflт эцжлflндирилмиш вfl зflрурflт йарандыгжа бу сащflдfl тflжрцбfl мцбадилflси апарылмышдыр. Бу сащflдfl мцхтflлиф бейнflлхалг малиййfl гурумларына мцвафиг щесабатлар щазырланыб тflгдим едилмишдир.

Internal loan rating The Bank will use its internal rating system to evaluate loan requests of those customers that are engaged in entrepreneurship.The preliminary version of the rating system was developed with consideration of various factors and results of implementation.The system is expected to be used on a regular basis since the beginning of 2009. Reporting The Department has developed a reporting system that helps in ensuring control over the Bank’s activities. Reports containing various analyses and information concerning current and forecast liquidity, balance changes, the most important liabilities that the Bank will have to pay within the next few days, control over the quality of the loan portfolio, the financing of assets using existing liabilities etc. are drawn up on a daily basis. Limit system In order to diversify the loan portfolio by area of activities, economic sectors and loan products, the Bank has developed its limit system. The Bank also plans to introduce a procedure that will ensure control over the limit system and eliminate the consequences of limit violation. Risk Management Committee In 2008, the RMC held 29 meetings and adopted resolutions concerning the following: limits on the balance of nostro accounts with contractor banks, cash limits on the treasury and branches, limits on the insurance of property and the Bank’s liabilities, limits on the minimum liquidity, limits on the diversification of the foreign exchange position, limits on banks, limits on products etc. In 2008, the Bank continued to pursue its anti-money laundering policy and intensified its activities in this area, implementing stricter controls over operations with foreign and local correspondent banks and, when necessary, exchanging experience with other organizations. The relevant reports were drawn up and presented to various international financial organizations.

Èëëèê ùåñàáàò / Annual report

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Бейнялхалг ямякдашлыг / International cooperation

Банк Республика харижи вfl бейнflлхалг малиййfl тflшкилатлары илfl flмflкдашлыьын даща да эенишлflндирилмflсинfl бюйцк юнflм верир. 2008-жи илдfl Банкын бу истигамflтдfl дfl фflалиййflти уьурлу олмушдур. Алманийанын КфW банк групунун цзвц ДЕЭ вfl СпаркассенФинанзэруппе цзвц СЫДТ 2005-жи илдflн етибарflн цмумиликдfl “25% + 1 сflщм” пакети илfl Банкын сflщмдарлары сырасына дахилдирлflр вfl бу Банкын бейнflлхалг flмflкдашлыьынын мцщцм амиллflриндflн биридир. Моодй’с Ынвесторс Сервиже аэентлийи 2008-жи илин нойабр айында Банк Республика-нын Б2 рейтингини “стабил” прогнозу илfl тflсдиглflмишдир. Бу рейтинг юлкflнин банк секторунда flн йцксflк рейтинглflрдflндир. Глобал игтисади бющрана бахмайараг Банк Республика-нын Б2 рейтингинин тflсдиглflнмflси онун уьурлу фflалиййflтинин эюстflрижисидир. Банк Республика-нын харижи вfl бейнflлхалг тflшкилатларла flмflкдашлыьында мцщцм истигамflтлflрдflн бири кредитлflшмfl вfl тижарflтин малиййflлflшдирилмflси цзрfl програмлардыр. 2008-жи илин ийул айында Банк Республика Раиффеисен Зентралбанк Юестерреижщ АЭ илfl 50 млн. АБШ доллары мflблflьиндfl кредит мцгавилflси имзаламышдыр вfl бу Азflрбайжанын юзflл банк секторунун тарихиндfl flн ири мцгавилfl олмушдур. 2008-жи илин май айында бейнflлхалг инвестисийа банкы Стандард Банк Плж. (Лондон) илfl 25 млн. АБШ доллары мflблflьиндfl синдикатлашдырылмыш кредит мцгавилflси дfl имзаланмышдыр. Банк Республика 2008-жи илин сонунда Авропа Йенидflнгурма вfl Инкишаф Банкы вfl ДЕЭ Инвестисийа Ширкflти илfl цмумиликдfl 22,5 млн. АБШ доллары мflблflьиндfl кредит мцгавилflлflри дfl баьламышдыр. Банк Республика 2008-жи илин йекунларына flсасflн Авропа Йенидflнгурма вfl Инкишаф Банкы тflрflфиндflн “Тижарflтин малиййflлflшдирилмflси цзрfl Азflрбайжанда flн фflал банк” мцкафатыны алмышдыр. Банк Республика кредитлflшмfl вfl тижарflтин малиййflлflшдирилмflси цзрfl програмлар чflрчивflсиндfl харижи вfl бейнflлхалг тflшкилатларла flмflкдашлыьын мигйасына эюрfl Азflрбайжанын апарыжы банкларындандыр.

Bank Respublika attaches great importance to the development of its cooperation with foreign and international financial organizations. The Bank’s performance in this area in 2008 was also successful. Since 2005, DEG, a member of the German KfW banking group, and SIDT, a member of Sparkassen-Finanzgruppe have held a '25% + 1 share' interest in the Bank, which is an important factor in the Bank’s international cooperation. The B2 rating assigned to Bank Respublika by Moody's Investors Service was confirmed in November 2008 with the ‘stable’ outlook. This is one of the highest ratings in Azerbaijan's banking sector. The fact that Bank Respublika retained its B2 rating in spite of the global economic crisis is another proof of its successful performance. Among the key directions in Bank Respublika's cooperation with foreign and international organizations are lending and trade financing programs. In July 2008, Bank Respublika and Raiffeisen Zentralbank Юsterreich AG entered into a $50 million agreement, which became the largest agreement in the history of private banking sector in Azerbaijan. In May 2008, Bank Respublika entered into a $25 million syndicated loan agreement with Standard Bank Plc. (London) international investment bank. Towards the end of 2008 Bank Respublika signed loan agreements with the European Bank for Reconstruction and Development and DEG Investment Company, with a total value of 22.5 million USD. On the basis of the 2008 results, Bank Respublika was named the “Most active trade finance bank in Azerbaijan” by the European Bank for Reconstruction and Development. Bank Respublika is one of Azerbaijan's leading banks in terms of cooperation with foreign and international organizations in the framework of lending and trade financing programs.

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Èëëèê ùåñàáàò / Annual report

Бейнялхалг ямякдашлыг / International cooperation

Банк Республика цчцн ачылмыш ясас бейнялхалг кредит хятляри (31 декабр 2008-жи ил тарихиня) The main international credit lines established for Bank Respublika (as of December 31, 2008)
Òÿøêèëàòëàð Organizations Raiffeisen Bank Авропа Йенидflнгурма вfl Инкишаф Банкы European Bank for Reconstruction and Development Standard Bank Plc. ДЕЭ Алманийа Инвестисийа Ширкflти German Investment Company DEG Щолландийа Инкишаф Малиййfl Ширкflти (ФМО) Netherlands Development Finance Company (FMO) Асийа Инкишаф Банкы Asian Development Bank Бейнflлхалг Малиййfl Корпорасийасы International Finance Corporation Commerzbank AG OFID Алман-Азflрбайжан Фонду German-Azerbaijan Fund BCP KfW bank qrupu KfW banking group Sumitomo Mitsui Bank Korporasiyası Sumitomo Mitsui Banking Corporation Wachovia Bank Dresdner Bank Kreditlяr Loans 50 mln. USD (CLN transaction) 40 mln. USD 25 mln. USD (Syndication loan) 22.5 mln. USD 20 mln. USD 13.3 mln. USD 5 mln. USD – 5 mln. USD 2.6 mln. USD – 2 mln. USD – – – Ticarяtin maliyyяlяшdirilmяsi Trade financing 7 mln. USD .8 9.5 mln. USD – – 2 mln. USD 3.5 mln. USD 10 mln. USD 13 mln. USD 1.5 mln. USD – 2 mln. USD – 2 mln. USD 2 mln. USD 1 mln. USD Cяmi Total 57 mln. USD .8 49.5 mln. USD 25 mln. USD 22.5 mln. USD 22 mln. USD 16.8 mln. USD 15 mln. USD 13 mln. USD 6.5 mln. USD 2.6 mln. USD 2 mln. USD 2 mln. USD 2 mln. USD 2 mln. USD 1 mln. USD

Банк Республика Америжан Ехпресс Банк, Жоммерзбанк АЭ, Дресднер Банк, Wажщовиа Банк, Раиффеисен Зентралбанк Юстерреижщ вfl диэflр апарыжы харижи банкларла мцхбир flлагflлflрfl маликдир. Банк Республика МастерЖард Ынтернатионал системинин принсипиал вfl ВЫСА Ынтернатионал системинин ассосиатив цзвцдцр. Банк Wестерн Унион, Жонтажт, Миэом, Бистрайа Пожщта, Жоинстар, Хпресс Моней, ПриватМонет, Близко вfl Аллур бейнflлхалг тflжили пул кючцрмfl системлflринfl гошулубдур. Банк Республика бейнflлхалг flмflкдашлыьынын инкишафы вfl даща да эенишлflндирилмflси истигамflтиндfl сflйлflрини давам етдирмflйи нflзflрдfl тутур.

Bank Respublika maintains correspondent relations with American Express Bank, Commerzbank AG, Dresdner Bank, Wachovia Bank, Raiffeisen Zentralbank Юsterreich and other international banks The Bank is also a principal member of the MasterCard International system and an associate member of the VISA International system. Bank Respublika has also joined the Western Union, Contact, Migom, Bistraya Pochta, Coinstar, Xpress Money, PrivatMoney, Blizko and Allure international express money transfer systems. Bank plans to continue its efforts to ensure the development and expansion of international cooperation.

Èëëèê ùåñàáàò / Annual report

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Мцштяри хидмяти вя мцштярилярля ялагяляр / Customer service and customer relations

Банк Республика-нын мцщцм приоритетлflриндflн бири дfl мцштflри хидмflтинин вfl мцштflрилflрлfl flлагflлflрин даими инкишафыдыр. Бу истигамflтдfl Банк мцштflри хидмflти кейфиййflтинин артырылмасы, хидмflт чешидинин эенишлflндирилмflси вfl мювжуд шflртлflринин даща да йахшылашдырылмасы цчцн иш апарыр. Банк Республика-нын мцштflрилflрfl йанашмасы онун мцштflрилflрfl цнванланмыш “Сизfl файдалы” слоганында, елflжfl дfl фflалиййflтиндfl вfl хидмflтлflриндfl flкс олунур. Яввflлки иллflрдfl олдуьу кими Банк Республика щflм фflрди, щflм дfl корпоратив мцштflрилflр секторунда фflал иш апарыр. 2008-жи илин сонуна Банкын мцштflри базасы 79 мин фflрди вfl 4 мин корпоратив мцштflрилflрдflн ибарflтдир. Банк Республика мцштflрилflрfl мцхтflлиф истещлак, ипотека вfl бизнес кредитлflри, депозитлflр, пластик картлар, пул кючцрмflлflри, гызыл кцлчflлflрин сатышы, банк сейфлflринин ижарflси, Интернет-Банк вfl диэflр банк хидмflтлflри эюстflрир. Мцштflри хидмflти сащflсиндfl важиб амиллflрдflн бири дfl мцштflрилflрfl фflрди йанашмадыр. Бунун бариз нцмунflси кими мцштflрилflрfl эениш сечим имканлары йарадан Банкын “Яманflт Шflртлflринин Сflрбflст Сечими” депозит програмыны гейд етмflк олар. Банк flманflтчилflри арасында мцтflмади олараг удуш кампанийасы да кечирир. Банк Республика пластик картлар сегментиндfl дfl апарыжы банклардандыр. Банк мцштflрилflрfl МастерЖард вfl ВЫСА бейнflлхалг пластик картларыны хидмflт щаггы олмадан пулсуз тflгдим едир. Банк картла 45 эцнflдflк фаизсиз кредит хflтти, Щоме Банкинэ, Жард-то-Жард, МобилБанк вfl саир flлавfl хидмflтлflр дfl тflклиф едир. Банкын пластик карт мцштflрилflри мцтflмади олараг удуш кампанийаларында иштирак едир. Банк дистант хидмflтлflрfl бюйцк юнflм верflрflк мцштflрилflрfl Интернет-Банк вfl Щоме Банкинэ хидмflтлflри эюстflрир. Банк Республика flщалийfl Wестерн Унион, Жоинстар, Жонтажт, Миэом, ПриватМоней, Быстрайа почта, Близко, Хпресс Моней вfl Аллур системлflри илfl тflжили пул кючцрмfl хидмflтлflри тflгдим едир. Банк корпоратив бизнес кредитлflри вfl тижарflтин малиййflлflшдирилмflси цзрfl хидмflтлflрfl дfl бюйцк юнflм верир. Бейнflлхалг малиййfl тflшкилатлары илfl flмflкдашлыг Банкын бу сащflдfl имканларына да мцсбflт тflсир етмflкдflдир.

One of Bank Respublika’s most important objectives is the constant development of customer service and customer relations. The Bank is constantly engaged in improving the quality of its customer service, as well as the terms and flexibility of the services it offers. Bank Respublika’s approach towards its customers is reflected in the slogan “Sizfl faydalı” (Beneficial to you), as well as in its operations and services. As in the previous years, Bank Respublika was very active in both the individual and corporate customer sectors. By the end of 2008, the Bank’s customer base included 79 thousand individual and 4 thousand corporate customers. Among the banking services that Bank Respublika offers to its customers are consumer, mortgage and business loans, deposits, plastic cards, money transfer, the sale of gold bullions, the renting of safe deposit boxes, Internet-Bank and other services. One of the most important factors in customer service is a tailored approach to customers. A shining example of this approach is Bank Respublika’s 'Free Choice of Deposit Terms' program that provides customers with a wide range of choices. The Bank also holds prize draws for its depositors on a regular basis. Bank Respublika is also one of the leading banks in the plastic card segment. The Bank offers MasterCard and VISA international plastic cards to its customers without any service fee. With its plastic cards, the Bank also offers an interest-free credit line for a period of up to 45 days, as well as Home Banking, Card-to-Card, MobilBank and other services. Holders of the Bank’s plastic cards regularly participate in prize draws. The Bank pays particular attention to remote customer services, including Internet-Bank and Home Banking services provided to its customers. Bank Respublika offers express money transfers using the Western Union, Coinstar, Contact, Migom, PrivatMoney, Bistraya pochta, Blizko, Xpress Money and Allure systems. The Bank also attaches great importance to services related to corporate business lending and trade financing.

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Èëëèê ùåñàáàò / Annual report

Мцштяри хидмяти вя мцштярилярля ялагяляр / Customer service and customer relations

2008-жи илдfl Банк Республика мцштflрилflрfl бир сыра йени мflщсуллар вfl хидмflтлflр тflгдим етмишдир - Илк Карт пластик картлары, Интернет юдflнишлflр цчцн ВиртуалЖард, СубаруЖард ко-бренд карты, ВЫСА Бусинесс вfl ВЫСА Бусинесс Эолд корпоратив картлары, МобилБанк хидмflти, гызыл кцлчflлflрин кредитfl сатышы, пластик карт мцштflрилflри цчцн дисконт програмы вfl саир. Банкда Азflрбайжан банк секторунда илк дflфfl 2006-жы илдfl тflтбиг едилмиш 3 рflгflмли телефон нюмрflси илfl “банка зflнэ 144” мflлумат хидмflти фflалиййflт эюстflрир. Банк Республика-нын мцщцм вflзифflлflриндflн бири хидмflт шflбflкflсинин эенишлflндирилмflсидир. Банк 2008-жи илдfl 8 йени офис ачмышдыр. Банкын щазырда Бакы, Эflнжfl, Сумгайыт, Минэflчевир, Ширван, Шflки, Губа, Хачмаз, Лflнкflран, Астара, Масаллы, Йевлах, Бflрдfl, Эюйчай, Эоранбой вfl Шflмкир шflщflрлflриндfl 32 филиалы вfl шюбflси фflалиййflт эюстflрир. Бакы шflщflриндfl Банкын Баш Офиси, “Мflркflз” “Азадлыг” , , , , , , , “Азнефт” “Бакыханов” “Ящмflдли” “Нflриманов” “Нflсими” “Нефтчилflр” “Прогресс” филиаллары, “Абшерон” “Алатава” “Аьа , , , Неймflтулла” “Мемар Яжflми” вfl “Йасамал” шюбflлflри , мювжуддур. Банк Республика Офис24 лайищflси илfl Азflрбайжанда физики шflхслflрfl щflфтflнин бцтцн эцнлflри 24 саат фасилflсиз хидмflт эюстflрflн йеэанfl банкдыр вfl бу Банкын мцштflрилflрfl хцсуси диггflтинин бариз эюстflрижисидир. Нювбflти 2009-жу илдfl Банк Республика Жflлилабад, Загатала, Сабирабад, Имишли, Гах, Дflвflчи вfl диэflр шflщflрлflрдfl йени филиалларын ачылышыны планлашдырыр. Банк Республика мцштflри хидмflтинин вfl мцштflрилflрлfl flлагflлflрин инкишафы цзрfl фflалиййflтини 2009-жу илдfl даща да эцжлflндирмflйи нflзflрдfl тутур.

The Bank’s cooperation with international financial organizations enhances its resources in this area. In 2008, Bank Respublika introduced a number of new products and services – Ilk Kart plastic cards, the VirtualCard card for Internet payments, SubaruCard cobrand card, VISA Business and VISA Business Gold corporate cards, MobilBank service, the sale of gold bullions, discount campaigns for holders of its plastic cards etc. Bank Respublika continues to offer its customers the three-digit hotline service, 'Call the Bank on 144', that it introduced for the first time in Azerbaijan in 2006. One of the most important priorities of Bank Respublika is the expansion of its service network. In 2008, the Bank opened 8 new offices. At present, the Bank has 32 branches and service points located in Baku, Ganja, Sumgayit, Mingechevir, Shirvan, Sheki, Guba, Khachmaz, Lenkoran, Astara, Masalli, Yevlakh, Barda, Goychay, Goranboy, and Shamkir. The Bank's headquarters are situated in Baku, as are the Merkez, Azadliq, Azneft, Bakikhanov, Ahmedli, Narimanov, Nasimi, Neftchiler and Progress branches and Absheron, Alatava, Aga-Neymatulla, Memar Adjemi and Yasamal service points. Under the Ofis24 project, Bank Respublika provides its customers with services 24 hours a day, 7 days a week. No other bank in Azerbaijan offers such a service, which is a clear sign of the Bank's special care for its customers. In 2009, Bank Respublika plans to open new branches in Djalilabad, Zagatala, Sabirabad, Imishli, Gax, Devechi and other towns. The Bank’s efforts towards the improvements of customer services and customer relations will be further intensified in 2009.

Èëëèê ùåñàáàò / Annual report

42

Маркетинг фяалиййяти / Marketing activity

Банк Республика-нын маркетинг фflалиййflти базар арашдырмалары, йени мflщсулларын йарадылмасы, реклам вfl ижтимаиййflтлfl flлагflлflри flщатfl едир. 2008-жи илдfl Банк Республика мцштflрилflрfl бир сыра йени мflщсуллар вfl хидмflтлflр тflгдим етмишдир – 7-17 йашлылар цчцн Азflрбайжанда илк дflфfl олараг Илк Карт пластик картлары, Интернет юдflнишлflр цчцн ВиртуалЖард, СубаруЖард ко-бренд пластик карты, МобилБанк хидмflти вfl диэflр хидмflтлflр. Илк Карт пластик картларынын ТВ вfl диэflр васитflлflрлfl реклам кампанийасы апарылмышдыр. Ил flрзиндfl Илк Карт истифадflчилflри арасында “Диснейленд сflйащflти” удуш кампанийасы да кечирилмишдир. Банк Республика 2008-жи илдfl пластик карт мцштflрилflри цчцн Азflрбайжанын мцхтflлиф тижарflт вfl хидмflт мцflссисflлflриндfl ендиримлflр flлдfl етмflк имканы йарадан дисконт програмыны тflтбиг етмишдир. Банк Республика пластик карт мцштflрилflри арасында щflмчинин “Малта Сflйащflти” вfl “Футбол цзрfl Авропа Чемпионатына Сflйащflт” удуш кампанийаларыны да щflйата кечирмишдир. Банк flманflтчилflри арасында удуш кампанийаларыны да давам етдирмишдир. Бу сырада мцкафатлары Щонда Ажжорд автомобили вfl щflр ай 7 flдflд гызыл кцлчfl олан “Пайыз щflдиййflлflри” кампанийасыны гейд етмflк олар. Бу кампанийа цзрfl ТВ, радио, Интернет, гflзет вfl саир васитflлflрлfl эениш реклам тflдбирлflри щflйата кечирилмишдир. 2008-жи илдfl Банкын мцхтflлиф филиалларынын, хцсуси илfl дfl йени ачылан филиалларын фflалиййflтинfl дflстflк мflгсflди илfl реклам тflдбирлflри дfl кечирилмишдир. Банк Республика ижтимаиййflтлfl flлагflлflр сащflсиндfl фflалиййflтинfl дfl бюйцк юнflм верир вfl бу истигамflтдfl мцхтflлиф ишлflр щflйата кечирир. 2007-жи вfl 2008-жи илин йекунларына flсасflн Банк Республика 2 дflфfl “Азflрбайжан банк секторунда flн фflал ПР хидмflти” номинасийасы цзрfl мцкафатла тflлтиф едилмишдир. Банкын фflалиййflти щаггында 2008-жи илдfl Кцтлflви информасийа васитflлflри илfl 70-дflн чох прес-релиз верилмишдир. Бу прес-релизлflр юлкflнин мцхтflлиф информасийа аэентликлflринин бцллетенлflриндfl, гflзетлflрдfl вfl информасийа сайтларында йерлflшдирилмишдир. Банк Республика "Файдалы Сflщифfl" вfl “Файдалы Хflбflрлflр” информасийа бцллетенлflринин бурахылышыны да мцтflмади

The key objectives of Bank Respublika's marketing activities include market research, development of new products, advertising and public relations. In 2008, Bank Respublika offered a number of new products and services to its customers, including the Ilk Kart plastic card, offered for the first time in Azerbaijan to persons aged 7-17 the VirtualCard for payments via the , Internet, the SubaruCard co-brand plastic card, MobilBank service and other services. The introduction of Ilk Kart plastic card was supported by a promotional campaign on TV and in other media. In 2008, the Bank also held the ‘Trip to Disneyland’ prize draw for holders of Ilk Kart cards. In 2008, Bank Respublika introduced a discount campaign that allows plastic card holders to receive discounts in various trade and service centers in Azerbaijan. The bank also held A trip to Malta’ and A Trip to the European Football ‘ ‘ Championship’ prize draws for holders of its plastic cards. The Bank also continued to hold prize draws for its depositors. Among them, we can mention the ‘Autumn Gifts” prize draw with prizes including a Honda Accord car and 7 gold bullions every month. These campaigns were advertized on TV, radio and the Internet, as well as in newspapers and other media. In 2008, the Bank held a number of promotional campaigns in order to support its branches, particularly those that had been newly opened. Bank Respublika attaches great importance to its public relations activities and implements various measures in this area. On the basis of the 2007 and 2008 results Respublika twice received an award in the “Most active PR service in Azerbaijan banking sector” category. The mass media featured more than 70 press-releases concerning the Bank's activities in 2008. These pressreleases were published in the newsletters and newspapers of various local new agencies, as well as on their websites. Bank Respublika regularly publishes Файдалы Сflщифfl (Useful Page) and Файдалы Хflбflрлflр (Useful News) newsletters to deliver information about the Bank’s activities, services

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Èëëèê ùåñàáàò / Annual report

Маркетинг фяалиййяти / Marketing activity

щflйата кечирир вfl бунунла да Банкын фflалиййflти, хидмflтлflри, кампанийалары щаггында жари вfl потенсиал мцштflрилflрfl эениш мflлумат чатдырылыр. Ил flрзиндfl йени филиалларын ачылышы, мцгавилflлflрин имзаланмасы вfl диэflр тflдбирлflр кечирилмишдир. Бир сыра тflдбирлflр вfl наилиййflтлflр цзрfl Кцтлflви информасийа васитflлflриндfl ТВ репортаълар верилмишдир. Йени ил вfl Новруз байрамлары мцнасибflтилfl Банкын тflбрик чархлары да ТВ вfl радиода йерлflшдирилмишдир. Банк Республика-нын Интернет сflщифflси 2008-жи илдfl “Ян йахшы корпоратив сайт” номинасийасы цзрfl “Неттй” Милли Интернет Мцкафатына лайиг эюрцлмцшдцр. Бу маркетинг вfl ижтимаиййflтлfl flлагflлflр сащflсиндfl Банкын даща бир наилиййflтидир. Банк Республика 2008-жи илдfl Бакы вfl Эflнжfl шflщflрлflриндfl кечирилflн сflрэилflрдfl иштирак етмишдир. Банк ил flрзиндfl “Эflлин таныш олаг” кампанийасыны давам етдирмишдир. Банк бир сыра спонсорлуг лайищflлflриндfl дfl иштирак етмишдир. Нювбflти 2009-жу илдfl Банк Республика маркетинг сащflсиндfl фflалиййflтини даща да инкишаф етдирмflйи нflзflрдfl тутур.

and campaigns to its current and potential customers. In the course of the year, the Bank opened new branches, entered into new agreements and held a number of other events. A number of events and accomplishments were covered by mass media inTV commentaries. The Bank’s New Year and Novruz Bayram holiday commercials were broadcast on TV and the radio. Bank Respublika’s website was awarded the Netty National Internet Award in the ‘Best Corporate Site of 2008’ category.This is another accomplishment the Bank has achieved in the area of marketing and public relations. In 2008, Bank Respublika participated in exhibitions held in Baku and Ganja with its own stand. The Bank’s “Let's Get Acquainted” campaign continued throughout the year. Bank Respublika also participated in a number of sponsoring projects. Bank Respublika plans to further improve its marketing operations in 2009.

Èëëèê ùåñàáàò / Annual report

46

Èíñàí ðåñóðñëàðû / Human resources

Инсан ресурслары банкын фflалиййflтиндfl мцщцм flщflмиййflтfl малик олдуьу цчцн онларын профессионал инкишафы вfl сосиал гайьысына галмаг банкын flсас вflзифflлflриндflн биридир. Инсан Ресурслары Департаментинин банкын стратеъи мflгсflдлflринfl чатмасы цчцн пешflкар команданын йарадылмасында ролу flвflзедилмflздир. Ишя гябул 2008-жи ил flрзиндfl Банк Республика-нын flмflкдашларынын сайы 390 нflфflрдflн 480 нflфflрfl гflдflр йцксflлмишдир ки, бу да 19% артым тflшкил едир. Ил flрзиндfl кадр ахарлылыьы 5% олмушдур ки, бу да дцнйа стандартларына уйьундур. Банкын flмflкдашларынын орта йаш эюстflрижиси 31-дир. ßìÿêäàøëàðûí ñàéû Number of the employees

As human resources play a very important role in the Bank’s operations, their professional improvement and social care is one of the Bank’s top priorities. The role of the Human Resources Department in the building of a highly professional team to achieve the Bank’s strategic goals is invaluable. Employment In 2008, the number of Bank Respublika's employees increased by 19%, from 390 to 480. The labor turnover in 2008 was 5%, which meets international standards. The average age of Bank’s employees is 31.

1 ÿìÿêäàøà äöøÿí àêòèâëÿð (ìèí ÀÇÍ) Assets per employee (thsd. AZN)

480 390 305 365 206 279 657

800

2005

2006

2007

2008

2005

2006

2007

2008

Тялим-тядрис фяалиййяти 2008-жи илдfl Банк Республика ишчилflрин пешflкар инкишафы цчцн лазыми шflраит йаратмаг мflгсflдилfl тflлим-тflдрис сийасflтини даща да инкишаф етдирди. Ил flрзиндfl ишчилflрин пешflкар билик вfl бажарыгларынын артырылмасы цчцн банк дахили бир сыра тflлимлflр кечирилмишдир ки, бу тflлимлflрдfl 436 ишчи иштирак етмишдир. Ил flрзиндfl бир сыра flмflкдашлар юлкfl харижиндfl мцхтflлиф тflлим, конфранс вfl семинарларда иштирак етмишлflр. Нювбflти иллflрдfl тflлим-тflдрис сийасflтини даща да тflкмиллflшдирилмflси нflзflрдfl тутулур.

Training and education In order to create opportunities for the professional improvement of its employees, Bank Respublika further developed its training and education policy in 2008. A number of trainings were held during the year to improve professional qualifications and skills of the staff, with the participation of 436 employees. During the year, a number of employees participated in trainings, conferences and workshops held abroad. The Bank plans to further improve its training and education policy in the coming years.

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Èëëèê ùåñàáàò / Annual report

Èíñàí ðåñóðñëàðû / Human resources

Ишчилярин мотивасийасы 2008-жи ил flрзиндfl Банк цзрfl ишчи щейflтинин flмflйинин гиймflтлflндирилмflси кечирилмишдир. Бу, flмflкдашларын мflважиблflринин артмасына, вflзифfl дflйишикликлflринfl, тflлим ещтийажларынын ашкар едилмflсинfl вfl кадр ещтийатынын йарадылмасына тflсир эюстflрмишдир. Банк Республика flмflкдашларын гейри-мадди мотивасийасына да хцсуси диггflт йетирмишдир. Белfl ки, Банкын филиал вfl департаментлflри арасында цнсиййflтин эцжлflндирилмflси, команда вfl корпоратив рущун инкишафы мflгсflдилfl Футзал турнири кечирилмишдир. Белfl тflдбирлflр нювбflти иллflр flрзиндfl даща да инкишаф етдирилflжflк. Ялавfl олараг ил flрзиндfl ишчилflрин ишдflн flлавfl вахтынын сflмflрflли кечмflси мflгсflдилfl flмflкдашлар мцхтflлиф идман комплекслflринfl абунfl илfl тflмин едилмишлflр. 2008-жи илин йекунларына flсасflн Банкын филиал вfl шюбflлflри “Илин филиалы” вfl “Илин шюбflси” номинасийалары илfl тflлтиф едилмишлflр.

Employee motivation In 2008, Bank conducted performance appraisals for its employees, which influenced their salaries and positions, as well as helped to locate areas where professional training is needed and to create personnel reserves. Bank Respublika also paid particular attention to the nonfinancial motivation of their employees. In order to strengthen cooperation between branches and service points and to promote team and corporate spirit the Bank held a futsal tournament. The Bank will further improve similar events in the coming years. In additions, Bank’s employees were provided with season tickets of various sports centers to help them spend their free time in a healthy and effective manner. On the basis of the 2008 results, the Bank named its “Branch of the Year” and “Service Point of the Year” .

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Тюрямя ширкятляр / Subsidiaries

“БакыСиьорта” АСЖ “БакыСыьорта” АСЖ 28 август 2007-жи ил тарихиндflн етибарflн там лисензийалы сыьорта фflалиййflтини щflйата кечирир. БакыСыьорта ширкflтин тflсисчилflри Банк Республика АСЖ (51%) вfl диэflр йерли щцгуги вfl физики шflхслflрдир. Ширкflтин юдflнилмиш низамнамfl капиталы 2008-жи илин сонуна 1,5 млн. АЗН тflшкил едир. БакыСыьорта ширкflти гыса мцддflт flрзиндfl дflйflрли сыьорта портфели формалашдырмышдыр. 2008-жи илин сонуна БакыСыьорта юлкflдfl фflалиййflт эюстflрflн 31 сыьорта ширкflти арасында 9-жу йери тутмушдур. Ширкflтин 2008-жи илдfl сыьорта щагларынын щflжми 8 533 364 АЗН, сыьорта юдflнишлflри исfl 764 261 АЗН олмушдур. БакыСыьорта 2008-жи илдfl уьурлу фflалиййflт эюстflрflрflк 689 860 АЗН халис мflнфflflт flлдfl етмишдир. БакыСыьорта ширкflти 27 нюв сыьорта хидмflтлflри тflгдим едир. Ширкflтин тflгдим етдийи flсас сыьорта нювлflри сырасында flмлак сыьортасы, нflглиййат васитflлflринин сыьортасы, нflглиййат васитflлflри сащиблflринин мцлки мflсулиййflтинин ижбари вfl кюнцллц сыьортасы, сцрцжц вfl сflрнишинлflрин бflдбflхт щадисflлflрдflн сыьортасы, цчцнжц шflхслflр гаршысында мцлки мflсулиййflтин сыьортасы, йцклflрин сыьортасы, иншаат сыьортасы, ишflэютцрflнин мflсулиййflтинин сыьортасы, тибби сыьорта, фflрди гflза сыьортасы, банк вfl банк фflалиййflтинин сыьортасы вfl диэflр сыьорта нювлflри вар. БакыСыьорта ширкflти етибарлы тflкрарсыьорта механизминfl flсасланараг бюйцк рисклflрин сыьортасыны тflмин етмflкдflдир. Ширкflт Авропанын flн апарыжы тflкрарсыьорта тflшкилатлары олан ЭенРе, Ллойдс оф Лондон Сйндижатес, Щанновер Ре, Жонвериум, Сwисс Ре Эерманй АЭ, Жщаусер, АЫЭ, Кореан Ре, Эенел Сиэорта, Транс Ре, Сжор, Росно, Руссиан Ре, Ынэосстракщ, АОН вfl Wиллис кими ширкflтлflрлfl flмflкдашлыг едир. Бундан башга Ширкflт йерли сыьорта вfl брокер ширкflтлflри илfl дfl flмflкдашлыг едир. “БакыСыьорта” АСЖ 2008-жи илдfl ИСО 9001-2000 “Идарflетмfl Кейфиййflти Системи” Сертификатыны “СЭС Азери Лтд” ширкflти тflрflфиндflн алмышдыр. Мцштflрилflрfl йцксflк кейфиййflтли хидмflт, щflр бир мцштflрийfl фflрди йанашма, сыьорта хидмflтлflринин эюстflрилмflсиндfl оперативлик, обйективлик вfl ющдflликлflрин йеринfl йетирилмflси БакыСыьорта ширкflтинин flсас щflдflфлflриндflндир. Бунлар Шир-

“БакыСиьорта” АСЖ БакыСыьорта ЪСЖ щас перформед фуллй лиженсед инсуранже оператионс синже 28 Ауэуст 2007 . Тще фоундерс оф БакыСыьорта аре Банк Республика ЪСЖ (51%) анд отщер ложал леэал ентитиес анд индивидуалс. Ас оф тще енд оф 2008, тще жомпанй’с паид-уп жапитал ис 1.5 миллион АЗН. Wитщин а сщорт период оф тиме, БакыСыьорта буилт а щиэщгуалитй инсуранже портфолио. Ас оф тще енд оф 2008, БакыСыьорта ис тще 9тщ амонэ тще 31 инсуранже жомпаниес оператинэ ин тще жоунтрй. Тще амоунт оф тще жомпанй’с инсуранже премиумс ин 2008 wас 8,533,364 АЗН, wщиле тще амоунт оф инсуранже жлаимс тоталед 764,261 АЗН. Ас а ресулт оф итс сужжессфул перформанже ин 2008, БакыСыьорта обтаинед а нет профит оф 689,860 АЗН. БакыСыьорта офферс 27 тйпес оф инсуранже сервижес. Тще кей тйпес оф инсуранже офферед бй тще жомпанй инжлуде пропертй инсуранже, вещижле инсуранже, мандаторй анд оптионал инсуранже оф вещижле оwнерс аэаинст живил лиабилитиес, ажжидент инсуранже фор дриверс анд пассенэерс, тщирд партй живил лиабилитй инсуранже, жарэо инсуранже, буилдер’с риск инсуранже, емплойер инсуранже, медижал инсуранже, индивидуал ажжидент инсуранже, банк инсуранже анд инсуранже фор банкинэ оператионс, ас wелл ас отщер тйпес оф инсуранже. БакыСыьорта провидес инсуранже аэаинст щиэщ рискс бй усинэ а релиабле реинсуранже межщанисм. Тще жомпанй жооператес wитщ тще леадинэ Еуропеан реинсуранже жомпаниес, инжлудинэ ЭенРе, Ллойдс оф Лондон Сйндижатес, Щанновер Ре, Жонвериум, Сwисс Ре Эерманй АЭ, Жщаусер, АЫЭ, Кореан Ре, Эенел Сиэорта, Транс Ре, Сжор, Росно, Руссиан Ре, Ынэосстракщ, АОН анд Wиллис. Асиде фром тщис, тще жомпанй алсо жоллаборатес wитщ ложал инсуранже анд брокер жомпаниес. Ын 2008, БакыСыьорта ЪСЖ режеивед тще ЫСО 9001-2000 Гуалитй Манаэемент Сйстем Жертифижате фром СЭС Азери Лтд. БакыСыьорта’с кей объежтивес инжлуде ехжелленже ин жустомер сервиже, таилоред аппроажщ то анй жустомер, еффижиенжй анд неутралитй ин тще провисион оф инсуранже сервижес анд перформанже оф облиэатионс. Тщис ис рефлежтед

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Тюрямя ширкятляр / Subsidiaries

кflтин мцштflрилflрfl цнванланмыш девизиндfl дfl flкс олунуб - “Биз Сизин ращатлыьыныз цчцн йарандыг” . “Республика Инвест” ММЖ “Республика Инвест”ММЖ “Банк Республика”АСЖ-нин тюрflмfl ширкflтидир вfl гиймflтли каьызлар базарында 1 март 2007-жи ил тарихдflн етибарflн пешflкар фflалиййflт эюстflрир. “Республика Инвест” ММЖ гиймflтли каьызлар базарында брокер вfl дилер хидмflтлflри эюстflрмflклfl йанашы Бакы Фонд Биръасынын 5,55% пай илfl сflщмдарларындан биридир. Ширкflт гыса заман flрзиндfl банклар, сыьорта ширкflтлflри вfl диэflр мцflссисflлflрдflн ибарflт мцштflри базасыны топлайа билмишдир вfl онлара дювлflт гиймflтли каьызлары илfl flмflлиййатлар сащflсиндfl, корпоратив борж ющдflликлflринин бурахылышы истигамflтиндfl, щflмчинин илкин вfl тflкрар сflщм базарларында там спектрли пешflкар хидмflтлflр эюстflрир. 2008-жи ил flрзиндfl Республика Инвест ширкflти мцштflрилflри цчцн 1 128,2 милйон АЗН мflблflьиндfl 714 flмflлиййат кечирмишдир. 2008-жи илин йекунларына flсасflн “Республика Инвест” ММЖ брокерлflр арасында дювлflт гиймflтли каьызлары илfl flмflлиййатлар сащflсиндfl 308 млн. манат дювриййfl илfl 3жц йери тутмушдур.

ин тще жомпанй’с слоэан, аддрессед то итс жустомерс: “Wе wорк фор йоур сафетй” . Respublika Invest LLP Respublika Invest LLP is a subsidiary of Bank Respublika JSC and has operated on the capital market since 1 March 2007 . Aside from providing broker and dealer services on the capital market, Respublika Invest LLP is also a shareholder of the Baku Stock Market with a participation interest of 5,55%. Within a short period of time, the company managed to build a customer base consisting of banks, insurance companies and other enterprises, to provide them with a full range of professional services in operations with securities, the issue of corporate bonds and operations on the primary and secondary share markets. During 2008, Respublika Invest performed for its customers 714 transactions with a total value of 1,128.2 million AZN. According to the 2008 results, Respublika Invest LLP , with a turnover of 308 million AZN, is the third among local brokers in terms of operations with securities.

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TABLE OF CONTENTS

STATEMENT OF MANAGEMENT’S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 56

INDEPENDENT AUDITORS’ REPORT

57-58

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008: Consolidated income statement Consolidated balance sheet Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements 59-60 61 62 63-64 65-122

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STATEMENT OF MANAGEMENT’S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008
The following statement, which should be read in conjunction with the independent auditors’ responsibilities stated in the independent auditors’ report set out on pages 57-58, is made with a view to distinguishing the respective responsibilities of management and those of the independent auditors in relation to the consolidated financial statements of Open Joint Stock Company Bank Respublika and its subsidiaries (the “Group”). Management is responsible for the preparation of the consolidated financial statements that present fairly the financial position of the Group at 31 December 2008, and the results of its operations, cash flows and changes in equity for the year then ended, in accordance with International Financial Reporting Standards (“IFRS”). In preparing the consolidated financial statements, management is responsible for: • Selecting suitable accounting principles and applying them consistently; • Making judgements and estimates that are reasonable and prudent; • Stating whether IFRS have been followed, subject to any material departures disclosed and explained in the consolidated financial statements; and • Preparing the consolidated financial statements on a going concern basis, unless it is inappropriate to presume that the Group will continue its business for the foreseeable future. Management is also responsible for: • Designing, implementing and maintaining an effective and sound system of internal controls, throughout the Group; • Maintaining proper accounting records that disclose, with reasonable accuracy at any time, the financial position of the Group, and which enable them to ensure that the consolidated financial statements of the Group comply with IFRS; • Maintaining statutory accounting records in compliance with legislation and accounting standards of Azerbaijan Respublic; • Taking such steps as are reasonably available to them to safeguard the assets of the Group; and • Detecting and preventing fraud and other irregularities. The consolidated financial statements for the year ended 31 December 2008 were authorized for issue on 23 April 2009 by the Management Board.

On behalf of the Management Board

Chairperson Ms. Khadija Hasanova 23 April 2009

Director of Financial Department Mr. Elnur Hasanov 23 April 2009

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Deloitte.
INDEPENDENT AUDITORS’ REPORT
To the Shareholders and Board of Directors of Open Joint Stock Company Bank Respublika: Report on the consolidated financial statements

Deloitte & Touche LLC 4th Floor The Landmark 96 Nizami Street Baku, AZ1010 Azerbaijan Tel: + 994 (0) 12 598 2970 Fax: + 994 (0) 12 598 2975 www.deloitte.az

We have audited the accompanying consolidated financial statements of Open Joint Stock Company Bank Respublika and its subsidiaries (the “Group”), which comprise the consolidated balance sheet as at 31 December 2008, the consolidated income statement, consolidated statements of changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors’ responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Except as discussed below, we believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

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Deloitte.

Basis for qualified opinion Certain buildings are stated at cost in the balance sheet at AZN 2,664 thousand. The Group did not perform a revaluation of these buildings at 31 December 2008 and, accordingly, it was not possible for us to determine whether their carrying amount differs materially from that which would have been determined using fair value as at 31 December 2008. Qualified opinion In our opinion, except for the effect of adjustments, if any, as might have been determined to be necessary upon the revaluation of the Group’s certain buildings the consolidated financial statements present fairly, in all material respects the financial position of the Group as at 31 December 2008, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

23 April 2009 Baku, the Republic of Azerbaijan

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60

CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2008
(in Azerbaijan Manats and in thousands, except for earnings per share which are in AZN)
Notes Interest income Interest expense NET INTEREST INCOME BEFORE PROVISION FOR IMPAIRMENT LOSSES ON INTEREST BEARING ASSETS Provision for impairment losses on interest bearing assets NET INTEREST INCOME Net loss on financial assets at fair value through profit or loss Net gain on foreign exchange operations Net (loss)/gain on gold operations Fee and commission income Fee and commission expense Dividend income Insurance premium earned Premiums ceded on reinsurance Other income Other expenses NON-INTEREST INCOME Gross claims paid Gross claims ceded Change in provision for unearned premiums, net of reinsurance Change in loss provision, net of reinsurance NET NON-INTEREST INCOME OPERATING INCOME OPERATING EXPENSES OPERATING PROFIT 12, 34 7 7 6, 7 6, 7 8 9 10 11, 34 11, 34 7 7 6, 34 5, 34 5, 34 Year ended 31 December 2008 47 ,997 (20,893) Year ended 31 December 2007 24,721 (11,692)

27 ,104 (6,416) 20,688 – 2,132 (69) 9,062 (2,730) 45 8,287 (350) 56 (60) 16,373 (1,100) 42 (4,873) (291) 10,151 30,839 (17 ,195) 13,644

13,029 (2,062) 10,967 (4) 731 60 5,125 (1,677) – 1,355 (172) 39 (18) 5,439 (66) – (736) (225) 4,412 15,379 (8,663) 6,716

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CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands, except for earnings per share which are in AZN)
Notes Provision for impairment losses on guarantees and other commitments PROFIT BEFORE INCOME TAX Income tax expense NET PROFIT Attributable to: Equity holders of the parent Minority interest 13 6 Year ended 31 December 2008 (255) 13,389 (2,947) 10,442 Year ended 31 December 2007 (28) 6,688 (1,600) 5,088

9,921 521 10,442

5,034 54 5,088 1.170

EARNINGS PER SHARE BASIC AND DILUTED (AZN)

14

1.225

On behalf of the Management Board

Chairperson Ms. Khadija Hasanova 23 April 2009

Director of Financial Department Mr. Elnur Hasanov 23 April 2009

The notes on pages 65 to 122 form an integral part of these consolidated financial statements.

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CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2008
(in Azerbaijan Manats and in thousands)
Notes ASSETS Cash and balances with the National Bank of the Republic of Azerbaijan Gold Financial assets at fair value through profit or loss Due from banks Loans to customers Investments available-for-sale Investments held to maturity Goodwill Property and equipment Investment property Intangible assets Other assets TOTAL ASSETS LIABILITIES AND EQUITY LIABILITIES: Due to banks Customer accounts Loans received from government agencies and foreign credit institutions Current income tax liabilities Deferred income tax liabilities Provision for impairment losses on other operations Other liabilities Subordinated debt Total liabilities EQUITY: Share capital Property revaluation reserve Retained earnings Total equity attributable to equity holders of the parent Minority interest Total equity TOTAL LIABILITIES AND EQUITY 15 16 17 18, 34 19 20 21 22 23 24 25, 34 31 December 2008 46,705 301 – 41,871 252,462 11,346 3,000 388 27 ,145 1,423 310 3,622 388,573 31 December 2007 18,342 5 10 38,471 158,044 22,417 – 388 9,605 – 293 1,901 249,476

26 27 34 , 28, 34 13 6, 7 29, 34 30, 34

95,126 137 ,779 87 ,533 1,058 2,217 6,536 897 16,236 347 ,382

9,777 111,673 87 ,338 689 541 1,160 1,108 17 ,172 229,458 12,580 1,807 5,263 19,650 368 20,018 249,476

31

22,578 7 ,434 9,946 39,958 1,233 41,191 388,573

On behalf of the Management Board

Chairperson Ms. Khadija Hasanova 23 April 2009

Director of Financial Department Mr. Elnur Hasanov 23 April 2009

The notes on pages 65 to 122 form an integral part of these consolidated financial statements.

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CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2008
(in Azerbaijan Manats and in thousands)
Share capital 31 December 2006 Share capital increase by issue of ordinary shares Dividends declared on ordinary shares Capitalization of dividends paid (retained earnings) Minority interest on acquisition date Net profit 31 December 2007 Revaluation of premises, net of income tax effect of AZN 1,587 Share capital increase by issue of ordinary shares Dividends declared on ordinary shares Share capital increase in subsidiary Net profit 31 December 2008 7 ,161 3,789 – 1,630 – – 12,580 – 9,998 – – Property revaluation reserve 1,807 – – – – – 1,807 5,627 – – – Retained earnings 2,428 – (2,199) – – 5,034 5,263 – – (5,238) – 9,921 9,946 Minority interest – – – – 314 54 368 – – – 344 521 1,233 Total Equity 11,396 3,789 (2,199) 1,630 314 5,088 20,018 5,627 9,998 (5,238) 344 10,442 41,191

22,578

7 ,434

On behalf of the Management Board

Chairperson Ms. Khadija Hasanova 23 April 2009

Director of Financial Department Mr. Elnur Hasanov 23 April 2009

The notes on pages 65 to 122 form an integral part of these consolidated financial statements.

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CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2008
(in Azerbaijan Manats and in thousands)
Notes CASH FLOWS FROM OPERATING ACTIVITIES: Profit before income tax Adjustments for: Provision for impairment losses on interest bearing assets Provision for impairment losses on guarantees and other commitments Provision for impairment losses on other transactions Net unrealized loss/(gain) arising from changes in foreign currency exchange rates Net unrealized loss/(gain) arising from changes on prices on gold Amortization of premiums on issued securities Dividend income Depreciation and amortization Gain on property and equipment disposal Change in interest accruals, net Net change in financial assets at fair value through profit and loss Cash flows from operating activities before changes in operating assets and liabilities Changes in operating assets and liabilities (Increase)/decrease in operating assets: Minimum reserve deposit with the National Bank of the Republic of Azerbaijan Gold Due from banks Loans to customers Financial assets at fair value through profit or loss Other assets Increase/(decrease) in operating liabilities Due to banks Customer accounts Loans received from the government agencies and foreign credit institutions Obligations under finance lease Other liabilities Cash inflow from operating activities before taxation Income tax paid Net cash inflow from operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, equipment and intangible assets Purchase of investment property Proceeds on sale of property, equipment and intangible assets Dividends received Proceeds on sale of investments available-for-sale Purchase of investments held to maturity Purchase of investments available-for-sale Acquisition of subsidiaries, net of cash acquired Net cash outflow from investing activities Year ended 31 December 2008 13,389 6,416 255 5,164 3 45 – (45) 1,735 (18) 2,786 – 29,730 Year ended 31 December 2007 6,688 2,062 28 961 (30) (8) (73) – 1,120 (3) 154 4 10,903

(2,700) (341) (4,343) (104,706) 10 (323) 84,240 29,596 2,564 (87) (89) 33,551 (2,489) 31,062

676 3 (115) (84,356) – (967) 2,546 58,902 51,057 8 584 39,241 (1,089) 38,152

(13,712) (1,423) 85 45 10,997 (3,000) – – (7 ,008)

(3,394) – 16 – – – (17 ,986) (822) (22,186)

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CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
Notes CASH FLOWS FROM FINANCING ACTIVITIES: Issue of ordinary share capital Issue of subsidiary’s ordinary share capital to minority shareholders Dividends paid Repayment of debt securities issued Proceeds from subordinated debt Net cash inflow from financing activities Effect of foreign exchange rate changes on cash and cash equivalents NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, beginning of year CASH AND CASH EQUIVALENTS, end of year 15 15 Year ended 31 December 2008 9,998 344 (5,238) – – 5,104 (5,205) 23,953 47 ,899 71,852 Year ended 31 December 2007 5,419 – (2,199) (2,949) 16,906 17 ,177 (172) 32,971 14,928 47 ,899

Interest paid and received by the Group in cash during the year ended 31 December 2008 amounted to AZN 17 ,521 thousand and AZN 47 ,413 thousand, respectively. Interest paid and received by the Group in cash during the year ended 31 December 2007 amounted to AZN 9,780 thousand and AZN 22,862 thousand, respectively.

On behalf of the Management Board

Chairperson Ms. Khadija Hasanova 23 April 2009

Director of Financial Department Mr. Elnur Hasanov 23 April 2009

The notes on pages 65 to 122 form an integral part of these consolidated financial statements.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008
(in Azerbaijan Manats and in thousands)
1. ORGANISATION
Joint Stock Commercial Bank Respublika was established in the Republic of Azerbaijan in 1992. The address of its registered office is as follows: 21, Khaqani Street, Baku AZ 1000, Azerbaijan. The Bank is regulated by the National Bank of the Republic of Azerbaijan (the “NBA”) and conducts its business under license number 83. On 6 October 2006 the Bank was re-organized to Open Joint Stock Company Bank Respublika (the “Bank”). The Bank’s primary business consists of commercial activities, origination loans and guarantees, and trading with foreign currencies. The Bank had 21 branches and 9 service points in Azerbaijan as at 31 December 2008 (31 December 2007: 13 branches and 10 service points). The Bank is a parent company of a banking group (the “Group”) which consists of the following enterprises consolidated in the financial statements:
Name Country of operation The Bank ownership interest/voting rights, % 2008 2007 51 100 Type of operation

Baki Sigorta OJSC Respublika Invest LLC

Azerbaijan Republic Azerbaijan Republic

51 100

Insurance Securities market transactions

Open Joint Stock Company Baki Sigorta is an open joint-stock company registered in the Republic of Azerbaijan on 28 August 2007 The principal activity of the company is insurance services. The company operates under insurance licenses . issued by the Ministry of Finance of the Republic of Azerbaijan dated 12 February 2004. Insurance business written by the company includes, but is not limited to, cargo, property, casualty, third party liability, automobile and reinsurance. The address of its registered office is as follows: 21, Khaqani Street, Baku AZ 1000, Azerbaijan. Respublika Invest LLC is a limited liability company registered in the Republic of Azerbaijan on 1 March 2007 The company’s . principal activity is operations with securities, broker and dealer operations. The company operates under broker and dealer licenses number 84 and 85 issued by the State Securities Committee of the Republic of Azerbaijan dated 24 September 2007 . As at 31 December 2007 and 2008 the following shareholders owned the issued shares of the Bank:
31 December 2008, % DEG (Deutsche Ivestitions - und Entwicklungsgesellshaft GmbH) Quliyev Natiq Saday oglu Quliyev Elchin Saday oglu Quliyeva Sevda Saday qizi Quliyev Saday Asad oglu Quliyeva Mariya Heydar qizi SIDT (Sparkassen International Development Trust GmbH) Others Total 16.67 16.66 15.10 14.53 14.36 14.07 8.33 0.28 100.00 31 December 2007, % 16.67 16.61 15.06 14.48 14.32 14.02 8.33 0.51 100.00

These consolidated financial statements were authorized for issue by the Management Board on 23 April 2009.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
2. BASIS OF PRESENTATION Accounting basis
These consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”) and Interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”). These consolidated financial statements are presented in thousands Azerbaijan Manats (“AZN”) unless otherwise indicated. These consolidated financial statements have been prepared under the historical cost convention, except for the measurement at fair value of certain financial instruments and measurement of buildings at revalued amounts according to International Accounting Standard (“IAS”) No. 16 “Property, Plant and Equipment” . The Group maintains its accounting records in accordance with Azerbaijan law. These consolidated financial statements have been prepared based on the Azerbaijani statutory accounting records and have been adjusted to conform with IFRS. These adjustments include certain reclassifications to reflect the economic substance of underlying transactions including reclassifications of certain assets and liabilities, income and expenses to appropriate financial statement captions.

Functional currency
Items included in the financial statements of each entity of the Group are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity (the “functional currency”). The functional currency of the consolidated financial statements is the Azerbaijan Manat (“AZN”).

3. SIGNIFICANT ACCOUNTING POLICIES Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Bank and entities controlled by the Bank (its subsidiaries) made up to 31 December each year. Control is achieved where the Bank has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group. All significant intra-group transactions, balances, income and expenses are eliminated on consolidation.

Business combinations
The assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognized as goodwill. Any deficiency of the cost of acquisition below the fair values of the identifiable net assets acquired (i.e. discount on acquisition) is credited to the consolidated income statement in the period of acquisition.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
The minority interest is initially measured at the minority’s proportion of the fair values of the assets, liabilities and contingent liabilities recognized. The equity attributable to equity holders of the parent and net profit attributable to minority shareholders’ interests are shown separately in the consolidated balance sheet and income statement, respectively. The Group accounts for increases in ownership of a controlled entity by revaluing all identified assets and liabilities of the subsidiary to fair value at the date of exchange in proportion to the amounts attributable to the additional interest acquired. Goodwill is recognized for any excess of the cost of the increase over the Group’s interest in the net fair value of the identifiable assets and liabilities. For a business combination involving an entity or business under common control, all assets and liabilities of the subsidiary are measured at the carrying values recorded in the stand-alone financial statements of the subsidiary. The difference between the carrying value of the acquired share in net assets of the subsidiary and the cost of acquisition are recorded directly in equity attributable to the equity holders of the parent. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. The difference, if any, between the carrying amount of minority interest and the amount received on its purchase is recognized in equity attributable to the equity holders of the parent.

Goodwill
Goodwill arising on the acquisition of a subsidiary represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets, liabilities and contingent liabilities of a subsidiary at the date of acquisition. Goodwill is initially recognized as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. The Group tests goodwill for impairment at least annually. An impairment loss recognized for goodwill is not reversed in a subsequent period. If the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the Group: (a) Reassesses the identification and measurement of the Group’s identifiable assets, liabilities and contingent liabilities and the measurement of the cost of the combination; and (b) Recognizes immediately in profit or loss any excess remaining after that reassessment. On disposal of an investment, the amount of goodwill attributable is included in the determination of the profit or loss on disposal.

Recognition and measurement of financial instruments
The Group recognizes financial assets and liabilities on its consolidated balance sheet when it becomes a party to the contractual obligation of the instrument. Regular way purchase and sale of the financial assets and liabilities are recognized using settlement date accounting. Regular way purchases of financial instruments that will be subsequently measured at fair value between trade date and settlement date are accounted for in the same way as for acquired instruments.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
Financial assets and liabilities are initially recognized at fair value plus, in the case of a financial asset or financial liability not at fair value through profit or loss transaction costs that are directly attributable to acquisition or issue of the financial asset or financial liability. The accounting policies for subsequent re-measurement of these items are disclosed in the respective accounting policies set out below.

Cash and cash equivalents
Cash and cash equivalents include cash on hand, unrestricted balances on correspondent and time deposit accounts with the National Bank of Azerbaijan with original maturity within 90 days, advances to banks in countries included in the Organization for Economic Cooperation and Development (“OECD”). For the purposes of determining cash flows, the minimum reserve deposit required by the National Bank of Azerbaijan and commemorative coins are not included as a cash equivalent due to restrictions on their availability (Note 15).

Gold
Assets and liabilities denominated in gold are translated at the current rate computed based on the second fixing of the London Metal Exchange rates, using the AZN/USD exchange rate effective at the date. Changes in the bid prices are recorded in net (loss)/gain on operations with gold operations.

Due from banks
In the normal course of business, the Group maintains advances and deposits for various periods of time with other banks. Due from banks are initially recognized at fair value. Due from banks with a fixed maturity term are subsequently measured at amortized cost using the effective interest method, and are carried net of any allowance for impairment losses. Those that do not have fixed maturities are carried at amortized cost based on expected maturities. Amounts due from credit institutions are carried net of any allowance for impairment losses.

Financial asset at fair value through profit or loss
Financial assets at fair value through profit or loss represent derivative instruments acquired principally for the purpose of selling them in the near future, or are a part of portfolio of identified financial instruments that are managed together and for which there is evidence of a recent and actual pattern of short-term profit taking are designated by the Group at fair value through profit or loss. Financial assets at fair value through profit or loss are initially recorded and subsequently measured at fair value. The Group uses quoted market prices to determine fair value for financial assets and liabilities at fair value through profit or loss. Fair value adjustment on financial assets and liabilities at fair value through profit or loss is recognized in the consolidated income statement for the period. The Group does not reclassify financial instruments in or out of this category while they are held. The Group enters into derivative financial instruments to manage currency and liquidity risks. They include forwards on foreign currency. Derivative financial instruments that are entered by the Group are not designed as hedge and do not qualify for hedge accounting.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
Loans to customers
Loans to customers are non-derivative assets with fixed or determinable payments that are not quoted in an active market other than those classified in other categories of financial assets. Loans to customers granted by the Group are initially recognized at fair value plus related transaction costs, such as loan origination and service cost, where the fair value of consideration given does not equal the fair value of the loan, for example where the loan is issued at lower than market rates, the difference between the fair value of consideration given and the fair value of the loan is recognized as a loss on initial recognition of the loan and included in the consolidated income statement according to nature of these losses. Subsequently, loans are carried at amortized cost using the effective interest method. Loans to customers are carried net of any allowance for impairment losses.

Write off of loans and advances
Loans and advances are written off against the allowance for impairment losses in the case of the uncollectibility of loans and advances, including the repossession of collateral. Loans and advances are written off after management has exercised all possibilities available to collect the amounts due to the Bank and after the Bank has sold all available collateral. In accordance with the statutory legislation, loans may only be written off with the approval of the Supervisory Board and, in certain cases, with the respective decision of the Court.

Allowance for impairment losses
Assets carried at amortized cost The Group accounts for impairment losses of financial assets when there is objective evidence that a financial asset or group of financial assets is impaired. Impairment losses are measured as the difference between carrying amounts and the present value of expected future cash flows, including amounts recoverable from guarantees and collateral, discounted at the financial asset’s original effective interest rate.
Such impairment losses are not reversed, unless 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 recognized, such as recoveries, in which case the previously recognized impairment loss is reversed by adjustment of an allowance account. For financial assets carried at cost, impairment losses are measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows, discounted at the current market rate of return for a similar financial asset. Such impairment losses are not reversed.

Available-for-sale financial assets If an available-for-sale asset is impaired, a consolidated amount comprising the difference between its cost (net of any principal payment and amortization) and its current fair value, less any impairment loss previously recognized in the consolidated income statement, is transferred from equity to the consolidated income statement. Reversals of impairment losses in respect of equity instruments classified as available-for-sale are not recognized in the consolidated income statement. Reversals of impairment losses on debt instruments are reversed through the consolidated income statement if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognized in the consolidated income statement.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
Derecognition of financial assets and liabilities
Financial assets A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognized where: • the rights to receive cash flows from the asset have expired; • the Group has transferred its rights to receive cash flows from the asset, or retained the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘passthrough’ arrangement; and • the Group either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. A financial asset is derecognized when it has been transferred and the transfer qualifies for derecognition. A transfer requires that the Group either: (a) transfers the contractual rights to receive the asset’s cash flows; or (b) retains the right to the asset’s cash flows but assumes a contractual obligation to pay those cash flows to a third party. After a transfer, the Group reassesses the extent to which it has retained the risks and rewards of ownership of the transferred asset. If substantially all the risks and rewards have been retained, the asset remains on the balance sheet. If substantially all of the risks and rewards have been transferred, the asset is derecognized. If substantially all the risks and rewards have been neither retained nor transferred, the Group assesses whether or not is has retained control of the asset. If it has not retained control, the asset is derecognized. Where the Group has retained control of the asset, it continues to recognize the asset to the extent of its continuing involvement. Financial liabilities A financial liability is derecognized when the obligation is discharged, cancelled, or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a de-recognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the consolidated income statement.

Finance leases
Finance leases are leases that transfer substantially all the risks and rewards incident to ownership of an asset. Title may or may not eventually be transferred. Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract. The lease is classified as finance lease if: • The lease transfers ownership of the asset to the lessee by the end of the lease term; • The lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than the fair value at the date the option becomes exercisable such that, at the inception of the lease, it is reasonably certain that the option will be exercised; • The lease term is for the major part of the economic life of the asset even if title is not transferred; • At the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset; and • The leased assets are of a specialized nature such that only the lessee can use them without major modifications being made.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
The Group as a lessee At the commencement of the lease term, the Group as a lessee recognizes finance leases as assets and liabilities in its consolidated balance sheet at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments. Subsequently, the minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability so as to produce a constant periodic rate of interest on the remaining balance of the liability. Finance charges are charged directly to profit or loss, unless they are directly attributable to qualifying assets, in which case they are capitalized in accordance with the Group’s general policy on borrowing costs. Contingent rents are charged as expenses in the periods in which they are incurred. Depreciation of the lease property is charged in accordance with depreciation policy that is applied to property owned by the Group.

Investments held to maturity
Investments held to maturity are debt securities with determinable or fixed payments. The Group has the positive intent and ability to hold them to maturity. Such securities are carried at amortized cost using the effective interest method, less any allowance for impairment. Amortized discounts are recognized in interest income over the period to maturity using the effective interest method.

Investments available-for-sale
Investments available-for-sale represent debt and equity investments that are intended to be held for an indefinite period of time. Investments available-for-sale are initially recorded at fair value and subsequently measured at fair value, with such re-measurement recognized directly in equity, except for impairment losses, foreign exchange gains or losses and interest income accrued using the effective interest method, which are recognized directly in the consolidated income statement. When sold, the gain/loss previously recorded in equity is recycled through the consolidated income statement. The Group uses quoted market prices to determine the fair value for the Group’s investments available-for-sale. If the market for investments is not active, the Group establishes fair value by using valuation techniques. Valuation techniques include using recent arm’s length market transactions between knowledgeable, willing parties, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models. If there is a valuation technique commonly used by market participants to price the instrument and that technique has been demonstrated to provide reliable estimates of prices obtained in actual market transactions, the Group uses that technique. Dividends received on investments available-for-sale are included in dividend income in the consolidated income statement. Non-marketable debt and equity securities are stated at amortized cost and cost, respectively, less impairment losses, if any, unless fair value can be reliably measured. When there is objective evidence that such securities have been impaired, the cumulative loss previously recognized in equity is removed from equity and recognized in the consolidated income statement for the period. Reversals of such impairment losses on debt instruments, which are objectively related to events occurring after the impairment, are recognized in the consolidated income statement for the period. Reversals of such impairment losses on equity instruments are not recognized in the consolidated income statement.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
Non-life insurance operations
• Premiums written - Upon inception of a contract, premiums are recorded as written and are earned primarily on a pro-rata basis over the term of the related policy coverage. • Provision for unearned premiums - Provision for unearned premiums represent the proportion of premiums written in the period that relate to unexpired terms of policies in force as at the balance sheet date, calculated on a time apportionment basis. • Claims paid - Claims paid including claims handling expenses are charged to the income statement as incurred.

Loss provision
Loss provision represents the accumulation of estimates for ultimate losses and includes outstanding claims provision (“OCP”) and provision for losses incurred but not yet reported (“IBNR”). Estimates of claims handling expenses are included in both OCP and IBNR. OCP is provided in respect of claims reported, but not settled as at the balance sheet date. The estimation is made on the basis of information received by the Group during investigation of insurance cases after the balance sheet date less regresses. IBNR is actuarially determined by the Group by line of business, and includes assumptions based on prior years’ claims and claims handling experience. The methods of determining such estimates and establishing the resulting provisions are continually reviewed and updated. Resulting adjustments are reflected in the income statement as they arise. The loss reserves are estimated on an undiscounted basis due to the relatively quick pattern of claims notification and payment.

Reinsurance
The Group assumes and cedes reinsurance in the normal course of business. However, ceded reinsurance contracts do not relieve the Group from its obligations to policyholders. Reinsurance assets include balances due from reinsurance companies for paid claims, including claims handling expenses, and premiums ceded to the Group. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Reinsurance payables are obligations of the Group for the transfer of reinsurance premiums to reinsurers and of the Group’s share in claims in respect of insurance cases reinsured by the Group. Reinsurance contracts that do not transfer insurance risk are accounted for directly through the balance sheet and are included in other receivables or payables. A deposit asset or liability is recognized based on the consideration paid or received less any explicitly identified premiums or fees to be retained by the reinsured.

Property, equipment and intangible assets
Property, equipment and intangible assets are carried at historical cost (except for buildings, which are stated at revalued amounts) less accumulated depreciation and amortization and any recognized impairment loss. Depreciation on assets under construction and those not placed in service commences from the date the assets are ready for their intended use.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
Depreciation of property, equipment and amortization of intangible assets is charged on their historical cost and is designed to write off assets over their useful lives. It is calculated on a straight line basis at the following annual rates:
Buildings Furniture and equipment Computers Vehicles Other equipment Leasehold improvements Intangible assets 5% 20% - 25% 25% 20% 20% - 25% 20% 25%

Leasehold improvements are amortized over the life of the related leased asset. Expenses related to repairs and renewals are charged when incurred and included in operating expenses unless they qualify for capitalization. The carrying amounts of land, property and equipment are reviewed at each balance sheet date to assess whether they are recorded in excess of their recoverable amounts. The recoverable amount is the higher of fair value less costs to sell and value in use. Where carrying values exceed the estimated recoverable amount, assets are written down to their recoverable amount; impairment is recognized in the respective period and is included in operating expenses. After the recognition of an impairment loss the depreciation charge for property and equipment is adjusted in future periods to allocate the assets’ revised carrying value, less its residual value (if any), on a systematic basis over its remaining useful life. Buildings held for use in supply of services, or for administrative purposes, are stated in the balance sheet at their revalued amounts, being the fair value at the date of revaluation, determined from market-based evidence by appraisal undertaken by professional independent appraisers, less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations are performed with sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair values at the balance sheet date. Any revaluation increase arising on the revaluation of such buildings is credited to the property revaluation reserve, except to the extent that it reverses a revaluation decrease for the same asset previously recognized as an expense, in which case the increase is credited to the consolidated income statement to the extent of the decrease previously charged. A decrease in carrying amount arising on the revaluation of such buildings is charged as an expense to the extent that it exceeds the balance, if any, held in the properties revaluation reserve relating to a previous revaluation of that asset. Depreciation on revalued buildings is charged to the consolidated income statement. On the subsequent sale or retirement of a revalued property, the attributable revaluation surplus remaining in the properties revaluation reserve is transferred directly to retained earnings. Market value of property is assessed using the comparable sales method which involves analysis of market sales prices for similar real estate property.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
Investment property
Investment property, comprising land, is held for long-term appreciation in value and is not occupied by the Group. Investment property is initially measured at cost, including transaction costs. Subsequent to initial recognition, investment property is carried at historical cost net of impairment loss.

Taxation
Income tax expense represents the sum of the current and deferred tax expense. The current tax expense is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s current tax expense is calculated using tax rates that have been enacted during the reporting period. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilized. Such assets and liabilities are not recognized if the temporary difference arises from the initial recognition of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognized for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realized. Deferred tax is charged or credited in the consolidated income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred income tax assets and deferred income tax liabilities are offset and reported net on the balance sheet if: • The Group has a legally enforceable right to set off current income tax assets against current income tax liabilities; and • Deferred income tax assets and the deferred income tax liabilities relate to income taxes levied by the same taxation authority on the same taxable entity.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
Azerbaijan also has various other taxes, which are assessed on the Group’s activities. These taxes are included as a component of operating expenses in the consolidated income statement. Due to banks, customer accounts, loans received from government agencies and foreign credit institution and subordinated debt Due to banks, customer accounts, loans received from government agencies and foreign credit institution and subordinated debt are initially recognized at fair value. Subsequently amounts due are stated at amortized cost and any difference between carrying and redemption value is recognized in the consolidated income statement over the period of the borrowings using the effective interest method.

Financial guarantee contracts issued and letters of credit
Financial guarantee contracts and letters of credit issued by the Group provide for specified payments to be made in order to reimburse the holder for a loss incurred such that payments are made when a specified debtor fails to make payment when due under the original or modified terms of a debt instrument. Such financial guarantee contracts and letters of credit issued are initially recognized at fair value. Subsequently they are measured at the higher of (a) the amount recognized as a provision in accordance with IAS 37 “Provisions, Contingent Liabilities and Contingent Assets”; and (b) the amount initially recognized less, where appropriate, cumulative amortization of initial premium revenue received over the financial guarantee contracts or letter of credit issued.

Provisions
Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the obligation can be made.

Contingencies
Contingent liabilities are not recognized in the consolidated balance sheet but are disclosed unless the possibility of any outflow in settlement is remote. A contingent asset is not recognized in the consolidated balance sheet but disclosed when an inflow of economic benefits is probable.

Share capital
Share capital is recognized at cost. Dividends on ordinary shares are recognized in equity as a reduction in the period in which they are declared. Dividends that are declared after the balance sheet date are treated as a subsequent event under International Accounting Standard 10 “Events after the Balance Sheet Date” (“IAS 10”) and disclosed accordingly.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
Retirement and other benefit obligations
In accordance with the requirements of legislation of the Republic of Azerbaijan, certain percentages of pension payments are withheld from total disbursements to staff to be transferred to pension funds, such that a portion of salary expense is withheld from the employee and instead paid to a pension fund on behalf of the employee. This expense is charged in the period in which the related salaries are earned. Upon retirement, all retirement benefit payments are made by the pension funds as selected by employees. The Group does not have any pension arrangements separate from the state pension system of the Republic of Azerbaijan. In addition, the Group has no post-retirement benefits or other significant compensated benefits requiring accrual.

Recognition of income and expense
Recognition of interest income and expense Interest income and expense are recognized on an accrual basis using effective interest method. The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability.
Once a financial asset or a group of similar financial assets has been written down (partly written down) as a result of an impairment loss, interest income is thereafter recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Interests earned on assets at fair value are classified within interest income. Recognition of fee and commission income and expense Loan origination fees are deferred, together with the related direct costs, and recognized as an adjustment to the effective interest rate of the loan. Where it is probable that a loan commitment will lead to a specific lending arrangement, the loan commitment fees are deferred, together with the related direct costs, and recognized as an adjustment to the effective interest rate of the resulting loan. Where it is unlikely that a loan commitment will lead to a specific lending arrangement, the loan commitment fees are recognized in the consolidated income statement over the remaining period of the loan commitment. Where a loan commitment expires without resulting in a loan, the loan commitment fee is recognized in the consolidated income statement on expiry. Loan servicing fees are recognized as revenue as the services are provided. All other commissions are recognized when services are provided.

Foreign currency translation
The individual financial statements of each Group entity are presented in the currency of the primary economic environment in which the entity operates (its functional currency). In preparing the financial statements of the individual entities, monetary assets and liabilities denominated in currencies other than the entity’s functional currency (foreign currencies) are translated at the appropriate spot rates of exchange rates prevailing at the balance sheet date. Transactions in currencies other than the functional currency are accounted for at the exchange rates prevailing at the date of the transaction. Profits and losses arising from these translations are included in net gain on foreign exchange operations.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
Rates of exchange
The exchange rates at the year end used by the Group in the preparation of the consolidated financial statements are as follows:
31 December 2008 USD 1 EUR 1 GBP 1 RUR 1 JPY 1 Gold (per ounce) = = = = = = AZN 0.8010 AZN 1.1292 AZN 1.1621 AZN 0.0272 AZN 0.0089 AZN 705.05 31 December 2007 USD 1 EUR 1 GBP 1 RUR 1 JPY 1 Gold (per ounce) = = = = = = AZN 0.8453 AZN 1.2450 AZN 1.6876 AZN 0.0346 AZN 0.0075 AZN 704.77

Offset of financial assets and liabilities
Financial assets and liabilities are offset and reported net on the consolidated balance sheet when the Group has a legally enforceable right to set off the recognized amounts and the Group intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. In accounting for a transfer of a financial asset that does not qualify for derecognition, the Group does not offset the transferred asset and the associated liability.

Segment reporting
A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment) or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. Segments with a majority of revenue earned from sales to external customers and whose revenue, result or assets are ten per cent or more of all the segments are reported separately. Geographical segment of the Group is based on the ultimate domicile of the Group. The Group’s primary format for reporting segment information is based on business segments. The accounting policies used in preparing and presenting the financial statements of the Group as a whole are also the fundamental segment accounting policies, segment accounting policies include, in addition, policies that relate specifically to segment reporting, such as identification of segments, and basis for allocating revenues and expenses to segments.

Areas of significant management judgment and sources of estimation uncertainty
The preparation of the Group’s consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities at the balance sheet date and the reported amounts of income and expenses during the period ended. Management evaluates its estimates and judgments on an ongoing basis. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The following estimates and judgments are considered important to the portrayal of the Group’s financial condition.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
Allowance for impairment of loans The Group regularly reviews its loans to assess for impairment. The Group’s loan impairment provisions are established to recognize incurred impairment losses in its portfolio of loans and receivables. The Group considers accounting estimates related to allowance for impairment of loans and receivables a key source of estimation uncertainty because (i) they are highly susceptible to change from period to period as the assumptions about future default rates and valuation of potential losses relating to impaired loans and receivables are based on recent performance experience, and (ii) any significant difference between the Group’s estimated losses and actual losses would require the Group to record provisions which could have a material impact on its consolidated financial statements in future periods. The Group uses management’s judgment to estimate the amount of any impairment loss in cases where a borrower has financial difficulties and there are few available sources of historical data relating to similar borrowers. Similarly, the Group estimates changes in future cash flows based on past performance, past customer behavior, observable data indicating an adverse change in the payment status of borrowers in a group, and 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 group of loans.The Group uses management’s judgment to adjust observable data for a group of loans to reflect current circumstances not reflected in historical data. The allowances for impairment of financial assets in the consolidated financial statements have been determined on the basis of existing economic and political conditions. The Group is not in a position to predict what changes in conditions will take place in the country and what effect such changes might have on the adequacy of the allowances for impairment of financial assets in future periods. The carrying amount of the allowance for impairment of loans is AZN 10,011 thousand and AZN 3,689 thousand as at 31 December 2008 and 2007 respectively. , Valuation of Financial Instruments Financial instruments that are classified at fair value through profit or loss or available for sale, and all derivatives, are stated at fair value. The fair value of such financial instruments is the estimated amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. If a quoted market price is available for an instrument, the fair value is calculated based on the market price. When valuation parameters are not observable in the market or cannot be derived from observable market prices, the fair value is derived through analysis of other observable market data appropriate for each product and pricing models which use a mathematical methodology based on accepted financial theories. Pricing models take into account the contract terms of the securities as well as market-based valuation parameters, such as interest rates, volatility, exchange rates and the credit rating of the counterparty. Where market-based valuation parameters are not directly observable, management will make a judgment as to its best estimate of that parameter in order to determine a reasonable reflection of how the market would be expected to price the instrument. In exercising this judgment, a variety of tools are used including proxy observable data, historical data, and extrapolation techniques. The best evidence of fair value of a financial instrument at initial recognition is the transaction price unless the instrument is evidenced by comparison with data from observable markets. Any difference between the transaction price and the value based on a valuation technique is not recognized in the consolidated income statement on initial recognition. Subsequent gains or losses are only recognized to the extent that it arises from a change in a factor that market participants would consider in setting a price.

Èëëèê ùåñàáàò / Annual report

80

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
The Group considers that the accounting estimate related to valuation of financial instruments where quoted markets prices are not available is a key source of estimation uncertainty because: (i) it is highly susceptible to change from period to period because it requires management to make assumptions about interest rates, volatility, exchange rates, the credit rating of the counterparty, valuation adjustments and specific feature of the transactions and (ii) the impact that recognizing a change in the valuations would have on the assets reported on its balance sheet as well as its profit/(loss) could be material. Had management used different assumptions regarding the interest rates, volatility, exchange rates, the credit rating of the counterparty and valuation adjustments, a larger or smaller change in the valuation of financial instruments where quoted market prices are not available would have resulted that could have had a material impact on the Group’s reported net income. The carrying amount of the financial instruments at fair value is as follows as at 31 December 2008 and 2007:
31 December 2008 Financial assets at fair value through profit or loss Debt securities available-for-sale – 11,011 31 December 2007 10 22,039

Goodwill Goodwill is the excess cost of an acquisition over the fair value of its net identifiable assets. The determination of fair value of assets and liabilities of businesses acquired requires the exercise of management judgment; for example those financial assets and liabilities for which there are no quoted prices, and those non-financial assets where valuations reflect estimates of market conditions. A difference in fair values would result in changes to the goodwill arising and to the post-acquisition performance of the acquisition. Goodwill is not amortized but is tested annually or more frequently for impairment if events or changes in circumstances indicated that it might be impaired. For the purposes of impairment testing, goodwill acquired in a business combination is allocated to each of the Group’s cashgenerating units or groups of cash-generating units expected to benefit from the combination. Goodwill impairment testing involves the comparison of the carrying value of a cash-generating unit or group of cash generating units with its recoverable amount. The recoverable amount is the higher of the unit’s fair value and its value in use. Value in use is the present value of expected future cash flows from the cash-generating unit or group of cash-generating units. Fair value is the amount obtainable for the sale of the cash-generating unit in an arm’s length transaction between knowledgeable, willing parties. Impairment testing inherently involves a number of judgmental areas: the preparation of cash flow forecasts for periods that are beyond the normal requirements of management reporting; the assessment of the discount rate appropriate to the business; estimation of the fair value of cash-generating units; and the valuation of the separable assets of each business whose goodwill is being reviewed. As at 31 December 2008 and 2007 the carrying amount of goodwill is AZN 388 thousand.

81

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
Adoption of new and revised standards
In the current year, the Group has adopted all of the new and revised Standards and Interpretations issued by the International Accounting Standards Board (the “IASB”) and the International Financial Reporting Interpretations Committee (the “IFRIC”) of the IASB that are relevant to its operations and effective for annual reporting periods ending on 31 December 2008. The adoption of these new and revised Standards and Interpretations has not resulted in significant changes to the Group’s accounting policies that have affected the amounts reported for the current or prior years. Amendments to IAS 1 “Capital Disclosures” (“IAS 1”) – On 18 August 2005, the IASB issued an amendment to IAS 1 which requires certain disclosures to be made regarding the entity’s objectives, policies and processes for managing capital. Additional information was disclosed in the consolidated financial statements for the current and comparative reporting periods as required by amended IAS 1. Amendments to IAS 39, “Financial Instruments: Recognition and Measurement” and IFRS 7 “Financial Instruments: , , Disclosures” titled “Reclassification of Financial Assets” – On 13 October 2008 IASB issued amendments to IAS 39 and IFRS , 7 which permits certain reclassifications of non-derivative financial assets (other than those designated as at fair value through profit or loss at initial recognition under the fair value option) out of the fair value through profit or loss category and also allow reclassification of financial assets from the available for sale category to the loans and receivables category in particular circumstances. The amendments to IFRS 7 introduce additional disclosure requirements if an entity has reclassified financial assets in accordance with the amendments to IAS 39. The amendments are effective as of 13 October 2008 and in certain circumstances can be applied retrospectively from 1 July 2008. The Group has elected not to apply the amendments to IAS 39 and IFRS 7 retrospectively.

Standards and interpretations issued and not yet adopted
At the date of authorization of these financial statements, other than the Standards and Interpretations adopted by the Group in advance of their effective dates, the following Interpretations were in issue but not yet effective. IFRS 8 – The IASB issued IFRS 8 “Operating Segments” in December 2006. This will replace IAS 14 “Segment Reporting” for accounting periods beginning on or after 1 January 2009. IFRS 8 requires segmental analysis reported by an entity to be based on information used by management. Management is currently assessing the impact of the adoption of IFRS 8. IAS 1 – On 6 September 2006, the IASB issued an amendment to IAS 1 which changes the way in which non-owner changes in equity are required to be presented to in IFRS but does not require that these be renamed in an entity’s financial statements. The amendment to IAS 1 is effective for periods beginning on or after 1 January 2009. IAS 23 – On March 2007 the IASB issued a revised IAS 23 “Borrowing Costs” 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. An entity is, therefore, required to capitalise borrowing costs as part of the cost of such asset. The Standard applies to borrowing costs relating to qualifying assets for which the commencement date for capitalisation is on or after 1 January 2009.

Èëëèê ùåñàáàò / Annual report

82

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
IAS 27 – In 2008 the Standard was amended as part of the second phase of the business combinations project. That phase of the project was undertaken jointly with the US Financial Accounting Standards Board (“FASB”). The amendments related, primarily, to accounting for non-controlling interests and the loss of control of a subsidiary. The boards concluded the second phase of the project by the IASB issuing the amended IAS 27 and the FASB issuing FASB Statement No. 160 Noncontrolling Interests in Consolidated Financial Statements, along with, respectively, a revised IFRS 3 Business Combinations and FASB Statement No. 141 (revised 2007) Business Combinations. The amended Standard must be applied for annual periods beginning on or after 1 July 2009. Earlier application is permitted. However, an entity must not apply the amendments for annual periods beginning before 1 July 2009 unless it also applies IFRS 3 (as revised in 2008).

4. GROUP REORGANIZATION
On 5 October 2007 the Group acquired 51% share in Baki Sigorta OJSC. The net assets of Baki Sigorta OJSC as at the date of this partial acquisition were as follows:
Baki Sigorta OJSC Cash Due from banks Accounts receivable and other current assets Other non-current assets Accounts payable and provision 2 864 14 2 (28) 854 51% 436 388 824

Share of net assets acquired Value of net assets acquired Goodwill Total consideration, satisfied by cash Net cash outflow arising on acquisition: Cash consideration paid Cash and cash equivalents acquired

(824) 2 (822)

The Group started to consolidate Baki Sigorta OJSC since 5 October 2007 The Bank established and started to consolidate . Respublika Invest LLC since 1 March 2007 .

83

Èëëèê ùåñàáàò / Annual report

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
5. NET INTEREST INCOME
Year ended 31 December 2008 Interest income comprises: Interest income on financial assets recorded at amortized cost: - interest income on unimpaired financial assets - interest income on impaired financial assets Interest income on investments available for sale Interest income on guarantees Total interest income Interest income on financial assets recorded at amortized cost comprises: Interest on loans to customers Interest on due from banks Interest on other operations Interest on investments held to maturity Total interest income on financial assets recorded at amortized cost Interest on investments available for sale Interest on guarantees Total interest income Year ended 31 December 2007

30,942 16,292 608 155 47 ,997

13,541 9,796 1,193 191 24,721

44,576 2,533 68 57 47 ,234 608 155 763

22,567 740 30 – 23,337 1,193 191 1,384

Interest expense comprises: Interest on financial liabilities recorded at amortized cost Total interest expense Interest expense on financial liabilities recorded at amortized cost comprises: Interest on customer accounts Interest on loans received from government agencies and foreign credit institutions Interest on subordinated debt Interest on due to banks Interest on debt securities issued Total interest expense on financial liabilities recorded at amortized cost Net interest income before provision for impairment losses on interest bearing financial assets

20,893 20,893

11,692 11,692

9,260 7 ,249 2,311 2,073 – 20,893

6,244 3,512 680 1,030 226 11,692

27,104

13,029

Èëëèê ùåñàáàò / Annual report

84

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
6. ALLOWANCE FOR IMPAIRMENT LOSSES AND OTHER PROVISIONS
The movements in allowance for impairment losses on interest earning assets were as follows:
Due from banks 31 December 2006 Additional provision recognized Write-off of assets Recovery of provision 31 December 2007 Additional provisions recognized Write-off of assets Recoveries of assets previously written off 31 December 2008 6 – – (6) – 47 – – 47 Loans to customers 1,641 2,068 (20) – 3,689 6,369 (50) 3 10,011 Total 1,647 2,068 (20) (6) 3,689 6,416 (50) 3 10,058

The movements in provision for impairment losses on other transactions were as follows:
Other assets Investments available-forsale – 110 – 110 43 – 153 Unearned premiums 31 December 2006 Additional provision due to acquisition of subsidiaries Additional provision recognized, net of reinsurance 31 December 2007 Additional provision recognized, net of reinsurance 31 December 2008 – 158 736 894 4,873 5,767 Guarantees and other commitments 82 – (82) – 212 – 212 Insurance operations – 41 225 266 291 557 Total – 199 961 1,160 5,164 6,324 Total

31 December 2006 Additional provision recognized Recovery of provision 31 December 2007 Additional provision recognized Write-off of assets 31 December 2008

4 – – 4 – (4) –

86 110 (82) 114 255 (4) 365

85

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
7. ANALYSIS OF PREMIUMS AND CLAIMS
The analysis of premiums and claims for year ended 31 December 2008 is as follows:
Vehicle Property Employer’s responsibility 14 (10) 4 Other Total

Gross premiums written Premiums ceded Net premiums written Change in provision for unearned premiums, net of reinsurance Net premiums earned Gross claims paid Claims ceded Net claims paid Change in loss provision, net of reinsurance Net claims incurred

7 ,369 (63) 7 ,306

475 (91) 384

429 (186) 243

8,287 (350) 7 ,937

(4,735) 2,571 (981) 35 (946) (311) (1,257)

(144) 240 (29) 1 (28) 1 (27)

(2) 2 – – – – –

8 251 (90) 6 (84) 19 (65)

(4,873) 3,064 (1,100) 42 (1,058) (291) (1,349)

The analysis of premiums and claims for year ended 31 December 2007 is as follows:
Vehicle Property Employer’s responsibility 140 (78) 62 Other Total

Gross premiums written Premiums ceded Net premiums written Change in provision for unearned premiums, net of reinsurance Net premiums earned Gross claims paid Net claims paid Change in loss provision, net of reinsurance Net claims incurred

934 (32) 902

187 (50) 137

94 (12) 82

1,355 (172) 1,183

(621) 281 (5) (5) (28) (33)

(71) 66 – – – –

(35) 27 (17) (17) (14) (31)

(9) 73 (44) (44) (183) (227)

(736) 447 (66) (66) (225) (291)

Èëëèê ùåñàáàò / Annual report

86

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
8. NET LOSS ON FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT AND LOSS
Net loss on financial assets at fair value through profit or loss comprises:
Year ended 31 December 2008 Year ended 31 December 2007 (4) (4) (4)

–Net loss on operations with derivative financial instruments
Total net loss on financial assets at fair value through profit or loss Net fair value adjustment Total net loss on operations with financial assets designated at fair value through profit or loss

– – –



(4)

The Group enters into derivative financial instruments to manage currency and liquidity risks and such financial instruments are held primarily for trading purposes.

9. NET GAIN ON FOREIGN EXCHANGE OPERATIONS
Net gain on foreign exchange operations comprises:
Year ended 31 December 2008 Dealing differences, net Translation differences, net Total net gain on foreign exchange operations 2,135 (3) 2,132 Year ended 31 December 2007 701 30 731

10. NET (LOSS)/ GAIN ON GOLD OPERATIONS
Net (loss)/gain on gold operations comprises:
Year ended 31 December 2008 Translation differences on gold, net (Loss)/gain from gold sale Total net (loss)/gain on gold operations (45) (24) (69) Year ended 31 December 2007 8 52 60

87

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
11. FEE AND COMMISSION INCOME AND EXPENSE
Fee and commission income and expense comprise:
Year ended 31 December 2008 Fee and commission income: Cash operations Settlements Plastic cards services Letters of credit Foreign exchange operations Other operations Reinsurance Guarantee letters Total fee and commission income Year ended 31 December 2007

3,513 2,285 1,979 901 241 72 57 14 9,062

2,389 1,500 1,085 98 8 18 – 27 5,125

Fee and commission expense: Plastic cards services Letters of credit Cash operations Guarantees Settlements Foreign exchange operations Other operations Total fee and commission income

1,044 513 405 371 199 91 107 2,730

699 164 280 194 155 118 67 1,677

12. OPERATING EXPENSES
Operating expenses comprise:
Year ended 31 December 2008 Salaries and bonuses Depreciation and amortization expense Advertising and marketing Professional services fees Operating lease expense Security costs Taxes other than income tax Communication expense Fees paid to Deposit Insurance Fund Transportation and travel Office expenses Insurance 9,168 1,735 1,064 780 748 736 582 541 450 374 274 229 Year ended 31 December 2007 4,422 1,120 477 221 450 285 213 375 172 217 172 140

Èëëèê ùåñàáàò / Annual report

88

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
Year ended 31 December 2008 Repairs and maintenance Utilities Membership fees Other expense Total operating expenses 210 85 25 194 17,195 Year ended 31 December 2007 147 59 27 166 8,663

13. INCOME TAXES
The Group provides for taxes based on the tax accounts maintained and prepared in accordance with the tax regulations of Azerbaijan where the Group and its subsidiaries operate and which may differ from IFRS. The Group is subject to certain permanent tax differences due to non-tax deductibility of certain expenses and a tax free regime for certain income. The statutory income tax rate is 22%. Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Temporary differences as at 31 December 2008 and 2007 relate mostly to different methods of income and expense recognition as well as to recorded values of certain assets. Temporary differences as at 31 December 2008 and 2007 comprise:
31 December 2008 Deductible temporary differences: Intangible assets Investments available-for-sale Other assets Other liabilities Due to banks Total deductable temporary differences: Taxable temporary differences: Property and equipment Provision for impairment losses on other operations Other liabilities Due from banks Total taxable temporary differences: Net deferred liabilities Deferred tax liabilities at the statutory rate of 22 % Net deferred tax liability 191 153 41 – – 385 31 December 2007 117 110 18 201 63 509

(9,654) (653) (155) – (10,462) (10,077) (2,217) (2,217)

(2,522) (398) – (46) (2,966) (2,457) (541) (541)

89

Èëëèê ùåñàáàò / Annual report

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
Relationships between tax expenses and accounting profit for the years ended 31 December 2008 and 2007 are explained as follows:
Year ended 31 December 2008 Year ended 31 December 2007 6,688 1,471 129 1,600 1,571 29 1,600 31 December 2007

4. GROUP REORGANIZATION
Profit before income tax

13,389 2,946 1 2,947 2,858 89 2,947 31 December 2008

On 5 October 2007 the Group acquired 51% share in Baki Sigorta OJSC.
Tax at the statutory tax rate Tax net assets of Baki differences The effect of permanent Sigorta OJSC as at the date of this partial acquisition were as follows: Income tax expense Current income tax expense Recovery of provision for deferred income tax liabilities Income tax expense

Deferred income tax liabilities Beginning of the period Tax effect of changes in property and equipment revaluation reserve Change in the income tax liability for the period charged to profit End of the period 541 1,587 89 2,217 512 – 29 541

14. EARNINGS PER SHARE
The earnings per share are calculated as follows:
Year ended 31 December 2008 Profit: Net profit for the year attributable to equity holders of the parent Weighted average number of ordinary shares for basic and diluted earnings per share Earnings per share – basic and diluted (AZN) Year ended 31 December 2007

9,921 8,098,746 1.225

5,034 4,303,581 1.170

Èëëèê ùåñàáàò / Annual report

90

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
15. CASH AND BALANCES WITH THE NATIONAL BANK OF THE REPUBLIC AZERBAIJAN
Cash and balances with the National Bank of the Republic of Azerbaijan comprise:
31 December 2008 Cash on hand Balances with the National Bank of the Republic of Azerbaijan Total cash and balances with the National Bank of the Republic of Azerbaijan 15,691 31,014 46,705 31 December 2007 11,502 6,840 18,342

The balances with the NBA as at 31 December 2008 and 2007 include AZN 6,560 thousand and AZN 3,860 thousand, respectively, which represent the minimum reserve deposits required by the NBA. The NBA granted permission to the Group to reduce the mandatory reserves account in the amount of mortgage loans, which are not refinanced by the Azerbaijan Mortgage Fund. The Bank is entitled to use all funds on its correspondent account provided that average daily balance for 15 days period will be eventually higher than required mandatory reserve. Cash and cash equivalents for the purposes of the statement of cash flows comprise:
31 December 2008 Cash and balances with the National Bank of the Republic of Azerbaijan Due from banks in OECD countries 46,705 31,744 78,449 (6,560) (37) 71,852 31 December 2007 18,342 33,417 51,759 (3,860) – 47,899

Less minimum reserve deposit with the National Bank of the Republic of Azerbaijan Less commemorative coins Total cash and cash equivalents

16. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
Financial assets at fair value through profit or loss comprise:
31 December 2008 Net fair value Nominal amount Asset Liability Foreign currency contracts Forwards 31 December 2007 Net fair value Nominal amount Asset Liability



– –

– –

4

10 10

– –

91

Èëëèê ùåñàáàò / Annual report

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
17. DUE FROM BANKS
Due from banks comprise:
31 December 2008 Correspondent accounts with other banks Loans and time deposits with other banks 28,580 13,338 41,918 (47) 41,871 31 December 2007 2,408 36,063 38,471 – 38,471

Less allowance for impairment losses Total due from banks

Movements in allowance for impairment losses for the years ended 31 December 2008 and 2007 are disclosed in Note 6. As at 31 December 2008 and 2007 accrued interest income included in due from banks amounted to AZN 141 thousand and AZN 134 thousand, respectively. As at 31 December 2007 the Group had term deposit in a foreign bank totaling to AZN 11,389 thousand which exceeds 50% of the Group’s equity. As at 31 December 2008 and 2007 the maximum credit risk exposure of due from banks amounted to AZN 41,871 thousand and AZN 38,471 thousand, respectively. During the years ended 31 December 2008 and 2007 the Group simultaneously placed with and received short-term funds from one bank in different currencies. As at 31 December 2008 and 2007 the Group placed equivalent of AZN 5, , 884 thousand and AZN 277 thousand, respectively, as deposits with the same banks, which were received from the same bank (Note 26).

18. LOANS TO CUSTOMERS
Loans to customers comprise:
31 December 2008 Loans to customers Less allowance for impairment losses Total loans to customers 262,473 (10,011) 252,462 31 December 2007 161,733 (3,689) 158,044

Movements in allowances for impairment losses for the years ended 31 December 2008 and 2007 are disclosed in Note 6. As at 31 December 2008 and 2007 accrued interest income included in loans to customers amounted to AZN 3,334 thousand and AZN 2,726 thousand, respectively.

Èëëèê ùåñàáàò / Annual report

92

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
The table below summarizes the amount of loans secured by collateral, rather than the fair value of the collateral itself:
31 December 2008 Loans collateralized by pledge of real estate, equipment and inventories Loans collateralized by vehicles Loans collateralized by deposits Loans collateralized by guarantees of individuals Loans collateralized by pledge of equipment Loans collateralized by pledge of corporate shares Loans collateralized by guarantees of legal entities Loans collateralized by precious metals Loans collateralized by guarantees of financial institutions Other collateral Unsecured loans 106,420 78,344 23,548 11,684 3,637 2,580 1,627 1,545 576 7 ,850 24,662 262,473 (10,011) 252,462 31 December 2007 89,693 28,571 7 ,371 7 ,148 7 ,407 4,799 2,107 1,183 626 8,941 3,887 161,733 (3,689) 158,044

Less allowance for impairment losses Total loans to customers Analysis by industry Individuals Trade Manufacturing Construction Agriculture Transport and communication

129,630 64,593 33,783 23,845 6,797 3,825 262,473 (10,011) 252,462

64,607 35,570 31,957 23,048 4,240 2,311 161,733 (3,689) 158,044

Less allowance for impairment losses Total loans to customers

Loans to individuals comprise the following products:
31 December 2008 Car loans Consumer loans Mortgage loans Plastic Cards Pawn loans Other 73,040 24,796 21,883 9,461 437 13 129,630 (3,247) 126,382 31 December 2007 22,156 17 ,187 19,342 5,521 350 51 64,607 (1,410) 63,197

Less allowance for impairment losses Total loans to individuals

93

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
As at 31 December 2007 the Group granted 4 loans totaling AZN 9,995 thousand, respectively, which individually exceeded 10% of the Group’s equity. As at 31 December 2008 and 2007 the maximum credit risk exposure of loans to customers amounted to AZN 252,462 thousand and AZN 158,044 thousand, respectively. As at 31 December 2008 and 2007 loans to customers included loans in amount of AZN 21 thousand and AZN 11,624 thousand, respectively, whose terms have been renegotiated. Otherwise these loans would be past due or impaired. As at 31 December 2008 and 2007 loans to customers included loans in amount of AZN 2,349 thousand and AZN 7 ,092 thousand, respectively, that were individually determined to be impaired. As at 31 December 2008 and 2007 such loans were collaterized by real estate, vehicles and equipment with a fair value of AZN 24,856 thousand and AZN 3,074 thousand, respectively.

19. INVESTMENTS AVAILABLE-FOR-SALE
Investments available-for-sale comprise:
31 December 2008 Debt securities Equity securities 11,011 488 11,499 (153) 11,346 31 December 2007 22,039 488 22,527 (110) 22,417

Less allowance for impairment losses Total investments available-for-sale

Movements in allowances for impairment losses for the years ended 31 December 2008 and 2007 are disclosed in Note 6. As at 31 December 2008 and 2007 accrued interest income included in investments available-for-sale amounted to AZN 10 thousand and AZN 41 thousand, respectively.

Èëëèê ùåñàáàò / Annual report

94

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
Nominal interest rate Debt securities Short-term notes of the National Bank of the Republic of Azerbaijan 31 December 2008 Nominal interest rate 31 December 2007

5.29%

11,011 11,011

10.17%

22,039 22,039

Equity investments Milli Kart LLC Baku Stock Exchange LLC

Ownership,% 10.00% 6.00% 400 88 488 (153) 11,346

Ownership,% 10.00% 6.00% 400 88 488 (110) 22,417

Less allowance for impairment losses Total investments available-for-sale

20. INVESTMENTS HELD TO MATURITY
As at 31 December 2008 the Group purchased long-term debt securities of three local companies totaling AZN 3,000 thousand with the amount of interest to nominal of 14%-16% and maturity in November 2010-January 2011. As at 31 December 2008 accrued interest income included in these investments held to maturity amounted to nil.

21. GOODWILL
Goodwill comprises:
Year ended 31 December 2008 At the beginning of the period Recognized on acquisition of a subsidiary At the end of the period 388 – 388 Year ended 31 December 2007 – 388 388

95

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
22. PROPERTY AND EQUIPMENT
Property and equipment comprise:
Land At cost 31 December 2006 Additions Disposals Transfer 31 December 2007 Additions Revaluation Disposals Transfer 31 December 2008 Accumulated depreciation 31 December 2006 Charge for the year Eliminated on disposal Transfer 31 December 2007 Charge for the year Eliminated on disposal Eliminated on revaluation Transfer 31 December 2008 Net book value 31 December 2008 31 December 2007 Buildings Furniture Leasehold ConstrucOther and Computers Vehicles improvetion in equipment equipment ments progress Total

– – – – – 5,603 – – – 5,603

5,171 1,051 – 567 6,789 978 6,322 – 2,058 16,147

1,385 674 – 15 2,074 1,512 – (138) (5) 3,443

665 460 – (13) 1,112 623 – – 5 1,740

353 707 (28) – 1,032 622 – (54) – 1,600

77 111 – 1 189 147 – – – 336

554 276 – (370) 460 21 – – 530 1,011

– 205 – (67) 138 2,481 – (12) (2,588) 19

8,205 3,484 (28) 133 11,794 11,987 6,322 (204) – 29,899

– – – – – – – – – –

(239) (290) – – (529) (369) – 893 – (5)

(558) (343) – (1) (902) (543) 92 – – (1,353)

(244) (193) – 1 (436) (316) – – – (752)

(120) (121) 15 – (226) (231) 46 – – (411)

(24) (24) – – (48) (43) – – (3) (94)

(2) (46) – – (48) (94) – – 3 (139)

– – – – – – – – – –

(1,187) (1,017) 15 – (2,189) (1,596) 138 893 – (2,754)

5,603 –

16,142 6,260

2,090 1,172

988 676

1,189 806

242 141

872 412

19 138

27,145 9,605

As at 31 December 2008 the certain buildings owned by the Group were revalued to market prices according to the opinion of the independent appraiser. As a result, carrying value of these certain building amounted to AZN 13,462 thousand. If the certain buildings were accounted at historical cost less accumulated depreciation and impairment losses, its carrying value would be AZN 4,036 thousand as at 31 December 2008. Method of sales comparison (comparative approach) was used for the estimation of their fair value. As at 31 December 2008 and 2007 included in property and equipment were fully depreciated assets of AZN 753 thousands and AZN 419 thousands, respectively.

Èëëèê ùåñàáàò / Annual report

96

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
23. INVESTMENT PROPERTY
At 31 December 2008 the Group acquired land as investment property which is held for long-term appreciation in value. At 31 December 2008 fair value of investment property amounted to AZN 1,423 thousand.

24. INTANGIBLE ASSETS
Intangible assets comprise:
Year ended 31 December 2008 At cost 1 January Additions 31 December Accumulated amortization 1 January Charge for the year 31 December Net book value 31 December Year ended 31 December 2007

560 156 716

452 108 560

(267) (139) (406)

(164) (103) (267)

310

293

Intangible assets include software and licenses.

25. OTHER ASSETS
Other assets comprise:
31 December 2008 Other financial assets recorded as loans and receivables in accordance with IAS 39: Settlements on money transfers Deferred expenses Receivables arising out of direct insurance operations Receivables on plastic card operations from other banks Accrued interest income on guarantee letters Repossessed collateral Other 501 386 306 184 31 – 142 1,550 – 1,550 31 December 2007 686 302 192 239 – 4 – 1,423 (4) 1,419

Less allowance for impairment losses

97

Èëëèê ùåñàáàò / Annual report

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
31 December 2008 Other non-financial assets: Prepayments for purchase of property and equipment Receivable from the State Budget Prepayments and receivables on other transactions Total other assets 31 December 2007

1,923 81 68 3,622

354 – 128 1,901

Movements in allowances for impairment losses on other assets for the years ended 31 December 2008 and 2007 are disclosed in Note 6.

26. DUE TO BANKS
Due to banks comprise:
31 December 2008 Recorded at amoritzed cost: Loans from banks Correspondent accounts of other banks Term deposits of banks 94,765 361 – 95,126 31 December 2007 6,471 297 3,009 9,777

3 Total due to banks

As at 31 December 2008 and 2007 accrued interest expense included in due to banks amounted to AZN 3,047 thousand and AZN 193 thousand, respectively. As at 31 December 2008 and 2007 the Group had loans and deposits from 2 and 1 banks totaling AZN 60,075 thousand and AZN 2,705 thousand, respectively, which individually exceeded 10% of the Group’s equity. During 2008 and 2007 the Bank simultaneously placed with and received short-term funds from one bank in different currencies (Note 17). Maturities of amounts due to banks are included in Note 39 under liquidity risk. These liabilities are measured at amortised cost.

27. CUSTOMER ACCOUNTS
Customer accounts comprise:
31 December 2008 Recorded at amoritzed cost: Time deposits Repayable on demand Total customer accounts 96,883 40,896 137,779 31 December 2007 80,546 31,127 111,673

Èëëèê ùåñàáàò / Annual report

98

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
As at 31 December 2008 and 2007 accrued interest expense included in customer accounts amounted to AZN 1,881 thousand and AZN 1,239 thousand, respectively. As at 31 December 2008 and 2007 customer accounts amounted to AZN 33 thousand and AZN 217 thousand, respectively, were held as security against guarantees issued.
31 December 2008 Individuals Trade Agriculture Manufacturing Insurance Transport and communication Investing Notarys’ offices Public organizations Construction Energy Other Total customer accounts 80,314 34,233 10,193 6,210 2,453 1,574 1,318 834 389 174 28 59 137,779 31 December 2007 69,902 12,434 1,306 4,234 5,492 1,127 12,513 3,173 1,069 286 6 131 111,673

These liabilities are measured at amortised cost.

28. LOANS RECEIVED FROM GOVERNMENT AGENCIES AND FOREIGN CREDIT INSTITUTIONS
Loans received from government agencies and foreign credit institutions comprise:
31 December 2008 Recorded at amortized cost: National Fund for Support of Entrepreneurship Azerbaijan Mortgage Fund Total loans from government agencies Recorded at amoritzed cost: European Bank for Reconstruction and Development FMO - Netherlands Development Finance Company International Finance Corporation The OPEC Fund for International Development Asian Development Bank German-Azerbaijan Fund DEG - Deutsche Investitions-Entwicklungsgeselschaft Black Sea Trade & Development Bank Total loans from foreign credit institutions Total loans from government agencies and foreign credit institutions 19,496 9,083 28,579 31 December 2007 17 ,917 5,042 22,959

32,328 11,920 4,089 4,005 2,615 2,498 1,499 – 58,954 87,533

26,745 15,354 4,296 4,348 3,426 1,790 3,000 5,420 64,379 87,338

99

Èëëèê ùåñàáàò / Annual report

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
As at 31 December 2008 and 2007 accrued interest expense is included in loans received from government agencies and foreign credit institutions amounting to AZN 1,161 thousand and AZN 1,235 thousand, respectively. As at 31 December 2008 and 2007 included in loans received from government agencies and foreign credit institutions are loans from the National Fund for Support of Entrepreneurship amounting to AZN 19,496 thousand and AZN 17 ,917 thousand, respectively. These loans have maturity periods from 1 year to 5 years and bear an annual interest rate of 1-2%. As at 31 December 2008 and 2007 included in loans received from government agencies and foreign credit institutions are loans from the Azerbaijan Mortgage Fund amounting to AZN 9,083 thousand and AZN 5,042 thousand, respectively. These loans have maturity periods from 1 year to 5 years and bear an annual interest rate of 1-2%. These liabilities are measured at amortised cost.

29. OTHER LIABILITIES
Other liabilities comprise:
31 December 2008 Other financial liabilities: Payables arising out of reinsurance operations Settlements on money transfers and plastic card operations Payable to the Deposit Insurance Fund Net payable under finance lease Accrued supplier’s cost Professional fees payable Payable to the employees Other 179 157 90 73 63 52 – 67 681 Other non-financial liabilities: Taxes other than income tax Other Total other liabilities 201 15 897 31 December 2007 145 268 78 160 90 71 54 214 1,080 22 6 1,108

The components of net payables under finance lease as at 31 December 2008 and 2007 are as follows:
31 December 2008 Not later than one year Later than one year not later than five years More than 5 years Total minimum lease payments Less: deferred finance expenses Net payables under finance lease Current portion Long-term portion Net payables under finance lease 54 25 – 79 (6) 73 51 22 73 31 December 2007 105 76 – 181 (21) 160 99 61 160

Èëëèê ùåñàáàò / Annual report

100

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
In 2007 the Group purchased 5 ATMs of AZN 122,992 thousand, partially financed under the finance lease. The lease term is 3 years. For the year ended 31 December 2007 and 2008 the effective borrowing rate was 13.8%. Interest rates are fixed at the contract date, and thus expose the Group to fair value interest rate risk. The lease is on a fixed repayment basis and no arrangements have been entered into for contingent rental payments.

30. SUBORDINATED DEBT
31 December 2008 Subordinated debt from foreign credit institutions - third parties Subordinated debt from foreign credit institutions - third parties Subordinated debt from related parties Total subordinated debt 31 December 2007

USD USD USD

7 .86% 10.13% 8.83%

2013-2015 2017 2017

8,034 4,109 4,093 16,236

8,478 4,326 4,368 17,172

As at 31 December 2008 and 2007 accrued interest expense is included in subordinated debt amounting to AZN 216 thousand and AZN 266 thousand, respectively. In the event of bankruptcy or liquidation of the Group, repayment of this debt is subordinate to the repayments of the Bank’s liabilities to all other creditors. The Group is obligated to comply with financial covenants in relation to subordinated debt disclosed above. These covenants include stipulated ratios, debt to equity ratios and various other financial performance ratios. The Group has not breached any of these covenants during the years ended 31 December 2008 and 2007 . These liabilities are measured at amortised cost.

31. SHARE CAPITAL
As of 31 December 2008 and 2007 the Group’s shareholders’ authorized, issued and fully paid capital amounted to AZN 22,578 thousand and AZN 12,580 thousand, respectively and comprised 11,289,094 and 6,290,198 ordinary shares with a par value of AZN 2, respectively. Each share entitles one vote to the shareholder. During 2008 and 2007 shareholders’ capital of the Group was increased by AZN 9,998 thousand and AZN 5,419 thousand, respectively. In 2008 and 2007 the Group declared dividends of AZN 5,238 thousand and AZN 2,199 thousand for 2007 and 2006 financial years, respectively, on ordinary shares.

101

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
32. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Group is a party to financial instruments with off-balance sheet risk in order to meet the needs of its customers. These instruments, involving varying degrees of credit risk, are not reflected in the consolidated balance sheet. The Group’s maximum exposure to credit loss under contingent liabilities and commitments to extend credit, in the event of non-performance by the other party where all counterclaims, collateral or security prove valueless, is represented by the contractual amounts of those instruments. The Group’s uses the same credit control and management policies in undertaking off-balance sheet commitments as it does for on-balance operations. Provision for losses on contingent liabilities amounted to AZN 6,536 thousand and AZN 1,160 thousand as at 31 December 2008 and 2007 respectively. , As at 31 December 2008 and 2007 the nominal or contract amounts and the risk amounts were: ,
31 December 2008 Nominal Amount Contingent liabilities and credit commitments Guarantees issued and similar commitments Commitments on loans and unused credit lines Letters of credit and other transaction related contingent obligations Total contingent liabilities and credit commitments 11,481 15,010 – 26,491 Risk Weighted Amount 11,448 7 ,399 – 18,847 31 December 2007 Nominal Amount 9,257 8,375 7 ,519 25,151 Risk Weighted Amount 8,535 3,451 2,407 14,393

Extension of loans to customers within credit line limits is approved by the Group on a case-by-case basis and depends on borrowers’ financial performance, debt service and other conditions. As at 31 December 2008 and 2007 such unused credit lines come to AZN 15,010 thousand and AZN 8,375 thousand, respectively. Capital commitments –The Group had no material commitments for capital expenditures outstanding as at 31 December 2008. Legal proceedings – From time to time and in the normal course of business, claims against the Group are received from customers and counterparties. Management is of the opinion that no material unaccrued losses will be incurred and accordingly no provision has been made in these consolidated financial statements.

Èëëèê ùåñàáàò / Annual report

102

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
Taxation – Commercial legislation of the countries where the Group operates, including tax legislation, may allow more than one interpretation. In addition, there is a risk of tax authorities making arbitrary judgments of business activities. If a particular treatment, based on management’s judgment of the Group’s business activities, was to be challenged by the tax authorities, the Group may be assessed additional taxes, penalties and interest. Operating environment – The Group’s principal business activities are within Azerbaijan. Laws and regulations affecting the business environment in Azerbaijan are subject to rapid changes and the Group’s assets and operations could be at risk due to negative changes in the political and business environment. Country overview and risks – Recent volatility in global financial markets and its effects on Azerbaijan. In recent months a number of major economies around the world have experienced volatile capital and credit markets. A number of major global financial institutions have been placed into bankruptcy, taken over by other financial institutions and/or supported by government funding. Notwithstanding any potential economic stabilisation measures that may be put into place by the Azerbaijan Government, as a consequence of this turmoil in capital and credit markets there exists, as at the date these financial statements are authorised for issue, globally and in Azerbaijan, economic uncertainties surrounding the continual availability, and cost, of credit both for the Group and its counterparties globally and in Azerbaijan. There is also potential for these economic uncertainties to continue in the foreseeable future and, as a consequence, there is impact on the Group’s profitability and potential risk that assets may not be recovered at their carrying amount in the ordinary course of business. Recoverability of financial assets – As a result of recent economic turmoil in capital and credit markets globally, and the consequential economic uncertainties existing as at balance sheet date, there exists the potential that assets may not be recovered at their carrying amount in the regular course of business. As at 31 December 2008, the Group has financial assets amounting to AZN 357 ,235 thousand (as at 31 December 2007: AZN 238,708 thousand). The recoverability of these financial assets depends on a large extent on the efficacy of the fiscal measures and other measures and other actions, beyond the Group’s control, undertaken within various countries to achieve economic stability and recovery. The recoverability of the Group’s financial assets is determined based on conditions prevailing and information available as at balance sheet date. It is the management’s opinion that no additional provision on financial assets is needed at present, based on prevailing conditions and available information. Government programs – The Azerbaijan government continues to exercise significant influence over the Azerbaijan economy. In response to the economic crisis and to support Azerbaijani businesses, the government of Azerbaijan has introduced certain measures including taxation holidays for banking sector from 1 January 2009, support from the National Bank of the Republic of Azerbaijan and continued support for the local currency, the Azerbaijani Manat. As Azerbaijan is heavily dependent on hydrocarbon revenues, the economy’s size and reserves are affected by oil prices fluctuations in the global market. Inflation – Historically, Azerbaijan has experienced high levels of inflation. The annual rate of inflation, as measures by changes in the Consumer Price Index, was 20.8% for 2008, 16.7% for 2007 (according to the State Statistic Committee of the Republic of Azerbaijan) and is projected at the rate of approximately 13% for 2009. The financial results in the Azerbaijan economy and, consequently, the Group’s financial results will be affected if inflation is not controlled effectively.

103

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
33. SUBSEQUENT EVENTS
On 20 February 2009 and 4 March 2009 the Group repaid credit linked notes amounted to USD 14 mln to Raiffeisen Zentralbank Österreich Aktiengesellschaft. According to the deal the Group gained USD 700 thousand for loan repayment before contracted maturity which is 10 July 2009.

34. TRANSACTIONS WITH RELATED PARTIES
Related parties or transactions with related parties, as defined by IAS 24 “Related party disclosures” represent: , (a) Parties that directly, or indirectly through one or more intermediaries: control, or are controlled by, or are under common control with, the Group (this includes parents, subsidiaries and fellow subsidiaries); have an interest in the Group that gives then significant influence over the Group; and that have joint control over the Group; (b) Associates – enterprises in which the Group has significant influence and which is neither a subsidiary nor a joint venture of the investor; (c) Members of key management personnel of the Group or its parent; (d) Close members of the family of any individuals referred to in (a) or (c); (e) Parties that are entities controlled, jointly controlled or significantly influenced by, or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (c) or (d). In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form. Transactions between the Bank and its subsidiaries, which are related parties of the Bank, have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Group and other related parties are disclosed below.

Èëëèê ùåñàáàò / Annual report

104

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
31 December 2008 31 December 2007 Total category Total category Related party as per financial Related party as per financial balances statements balances statements caption caption Loans to customers – shareholders and entities in which a substantial interest is owned by shareholders of the Group – key management personnel of the Group Allowance for impairment losses – shareholders and entities in which a substantial interest is owned by shareholders of the Group – key management personnel of the Group Investments held to maturity – shareholders and entities in which a substantial interest is owned by shareholders of the Group – key management personnel of the Group Other assets – key management personnel of the Group Customer accounts – shareholders and entities in which a substantial interest is owned by shareholders of the Group – key management personnel of the Group Loans from government agencies and foreign credit institutions – shareholders and entities in which a substantial interest is owned by shareholders of the Group Other liabilities – shareholders and entities in which a substantial interest is owned by shareholders of the Group – key management personnel of the Group Subordinated debt – shareholders and entities in which a substantial interest is owned by shareholders of the Group Commitments on credits and unused credit – shareholders and entities in which a substantial interest is owned by shareholders of the Group – key management personnel of the Group 262,473 21,627 1,309 (10,011) (1,415) (61) 3,000 2,500 – 3,622 256 137 ,779 11,342 265 87 ,533 1,499 897 – – 16,236 4,093 15,010 87 121 Year ended 31 December 2008 12 42 Year ended 31 December 2007 4,368 8,375 8 7 17 ,172 3,058 1,108 804 196 87 ,338 315 111,673 – – 1,901 (36) (11) – 1,798 552 (3,689) 161,733

Total category Total category Related party as per financial Related party as per financial transactions statements transactions statements caption caption Key management personnel compensation: short-term employee benefits

983

9,168

891

4,422

105

Èëëèê ùåñàáàò / Annual report

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
Included in the consolidated income statement for the years ended 31 December 2008 and 2007 are the following amounts which arose due to transactions with related parties:
Year ended 31 December 2008 Year ended 31 December 2007

Total category Total category Related party as per financial Related party as per financial balances statements balances statements caption caption Interest income – shareholders and entities in which a substantial interest is owned by shareholders of the Group – key management personnel of the Group Interest expense – shareholders and entities in which a substantial interest is owned by shareholders of the Group – key management personnel of the Group Allowance for impairment losses – shareholders and entities in which a substantial interest is owned by shareholders of the Group – key management personnel of the Group Fee and commission income – shareholders and entities in which a substantial interest is owned by shareholders of the Group – key management personnel of the Group Fee and commission expense – key management personnel of the Group Operating expense – shareholders and entities in which a substantial interest is owned by shareholders of the Group – key management personnel of the Group 47 ,997 355 101 (20,893) (1,001) – (6,416) (1,379) (50) 9,062 264 – (2,730) (24) (17 ,195) – (983) (69) (891) (19) (8,663) 52 (1,677) (31) (4) 5,125 (767) – (2,062) 177 33 (11,692) 24,721

35. SEGMENT REPORTING
The Group’s primary format for reporting segment information is business segments and the secondary format is a geographical segment. Business segments The Group is organized on the basis of three main business segments: • Retail banking – representing private banking services, private customer current accounts, savings, deposits, investment savings products, custody, credit and debit cards, consumer loans and mortgages. • Corporate banking – representing direct debit facilities, current accounts, deposits, overdrafts, loan and other credit facilities and foreign currency products. • Other – insurance, brokerage and other. Transactions between the business segments are (on normal commercial terms and conditions. Funds are ordinarily reallocated between segments, resulting in funding cost transfers disclosed in operating income. Interest charged for these funds is based on the Group’s cost of capital.) There are no other material items of income or expense between the business segments. Segment assets and liabilities comprise operating assets and liabilities, being the majority on the balances sheet, but excluding items such as taxation and borrowings.

Èëëèê ùåñàáàò / Annual report

106

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
Retail banking Corporate banking As at and for the year ended 31 December Unallocated 2008 and other Consolidated amount 1,747 – – 2,132 (45) – (1,075) 45 8,287 (350) – (60) (1,100) 42 (4,873) (291) 4,459 (17 ,195) (12,736) 47 ,997 (20,893) (6,416) 2,132 (69) 9,062 (2,730) 45 8,287 (350) 56 (60) (1,100) 42 (4,873) (291) 30,839 (17 ,195) 13,644

Interest income Interest expense Provision for impairment losses on interest bearing assets Net gain on foreign exchange operations Net loss on gold operations Fee and commission income Fee and commission expense Dividend income Insurance premium earned Premium ceded on reinsurance Other income Other expense Gross claims paid Gross claims ceded Change in provision for unearned premiums, net of reinsurance Change in loss provision, net of reinsurance Total operating income Operating expenses Operating profit/loss Provision for impairment losses on guarantees and other transactions Profit/(loss) before income tax Income tax expense Net profit/(loss) Segment assets Segment liabilities

31,162 (6,549) (3,946) – (24) 6,832 (897) – – – – – – – – – 26,578 – 26,578

15,088 (14,344) (2,470) – – 2,230 (758) – – – 56 – – – – – (198) – (198)

– 26,578 – 26,578 125,137 73,509

(231) (429) – (429) 183,542 263,165

(24) (12,760) (2,947) (15,707) 79,894 10,708

(255) 13,389 (2,947) 10,442 388,573 347,382

Other segment items Depreciation charge on property and equipment Loans to customers Property and equipment Investment property Customer accounts

– 125,137 – – 73,509

– 127 ,325 – – 64,270

(1,735) – 27 ,145 1,423 –

(1,735) 252,462 27 ,145 1,423 137 ,779

107

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
Retail banking Corporate banking As at and for the year ended 31 December Unallocated 2007 and other Consolidated amount 1,864 (226) – (4) 731 60 – (627) 1,355 (172) 39 (18) (66) – (736) (225) 1,975 (8,663) (6,688) 24,721 (11,692) (2,062) (4) 731 60 5,125 (1,677) 1,355 (172) 39 (18) (66) – (736) (225) 15,379 (8,663) 6,716

Interest income Interest expense Provision for impairment losses on interest bearing assets Net loss on financial assets and liabilities at fair value through profit or loss Net gain on foreign exchange operations Net gain on gold operations Fee and commission income Fee and commission expense Insurance premium earned Premium ceded on reinsurance Other income Other expense Gross claims paid Gross claims ceded Change in provision for unearned premiums, net of reinsurance Change in loss provision, net of reinsurance Total operating income Operating expenses Operating profit/loss Provision for impairment losses on guarantees and other transactions Profit/(loss) before income tax Income tax expense Net profit/(loss) Segment assets Segment liabilities

12,801 (4,305) (1,120) – – – 3,848 (694) – – – – – – – – 10,530 – 10,530

10,056 (7 ,161) (942) – – – 1,277 (356) – – – – – – – – 2,874 – 2,874

– 10,530 – 10,530 63,197 69,333

– 2,874 – 2,874 155,735 156,627

(28) (6,716) (1,600) (8,316) 30,544 3,498

(28) 6,688 (1,600) 5,088 249,476 229,458

Other segment items Depreciation charge on property and equipment Loans to customers Property and equipment Customer accounts

– 63,197 – 69,333

– 94,847 – 42,340

(1,120) – 9,486 –

(1,120) 158,044 9,605 111,673

Èëëèê ùåñàáàò / Annual report

108

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
36. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is defined as the amount at which the instrument could be exchanged in a current transaction between knowledgeable willing parties in an arm’s length transaction, other than in forced or liquidation sale. The estimates presented herein are not necessarily indicative of the amounts the Group could realize in a market exchange from the sale of its full holdings of a particular instrument. The fair value of financial assets and liabilities compared with the corresponding carrying amount in the consolidated balance sheet of the Group is presented below:
31 December 2008 Carrying value Cash and balances with the National Bank of the Republic of Azerbaijan Financial assets at fair value through profit or loss Due from banks Investments available-for-sale Other financial assets Due to banks Customer accounts Loans received from government agencies and foreign credit institution Subordinated debt Other financial liability Fair value 31 December 2007 Carrying value Fair value

46,705 – 41,871 11,011 1,550 95,126 137 ,779 87 ,533 16,236 681

46,705 – 41,871 11,011 1,550 95,126 137 ,779 87 ,533 16,236 681

18,342 10 38,471 22,039 1,419 9,777 111,673 87 ,338 17 ,172 1,080

18,342 10 38,471 22,039 1,419 9,777 111,673 87 ,338 17 ,172 1,080

The fair value of loans to customers and investments held to maturity cannot be measured reliably as it is not practicable to obtain market information or apply any other valuation techniques on such instruments. The fair value of equity securities included in equity investments available-for-sale cannot be measured reliably. As at 31 December 2008 and 2007 the carrying value of them was AZN 335 thousand and AZN 378 thousand, respectively. Since these shares are not publicly traded and the range of reasonable fair value estimates is significant, it is not possible to estimate fair value.

109

Èëëèê ùåñàáàò / Annual report

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
37. REGULATORY MATTERS
Quantitative measures established by regulation to ensure capital adequacy require the Group to maintain minimum amounts and ratios (as set forth in the table below) of total (8%) and tier 1 capital (4%) to risk weighted assets. As at 31 December 2007 the Group included in the computation of Total capital for Capital adequacy purposes the subordinated debt received, limited to 50% of Tier 1 capital. In the event of bankruptcy or liquidation of the Group, repayment of this debt is subordinate to the repayments of the Group’s liabilities to all other creditors. The ratio was calculated according to the principles employed by the Basel Committee by applying certain risk estimates to the assets and off-balance sheet commitments net of allowances for impairment losses: The Group’s actual capital amounts and ratios are presented in the following table:
Capital amounts and ratios Actual Amount in AZN For Capital Adequacy purposes Amount in AZN Ratio For Capital Adequacy purposes Minimum Required Ratio

As at 31 December 2008 Total capital Tier 1 capital As at 31 December 2007 Total capital Tier 1 capital

41,191 33,945

57 ,400 33,945

20% 12%

8% 4%

20,018 17 ,822

28,540 17 ,822

16% 10%

8% 4%

In addition, the Group has to calculate statutory capital adequacy ratio based on the Azerbaijan regulations. During the years ended 31 December 2008 and 2007 the Bank and Open Joint Stock Company Baki Sigorta were in compliance with the minimum capital requirements imposed by the NBA and the Ministry of Finance of the Republic of Azerbaijan.

38. CAPITAL MANAGEMENT
The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of debt, which includes subordinated debt disclosed in Note 30, and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings as disclosed in consolidated statement of changes in equity. The ALMC reviews the capital structure on a semi-annual basis. As a part of this review, the Board considers the cost of capital and the risks associated with each class of capital. Based on recommendations of the Board, the Group balances its overall capital structure through the payment of dividends, new share issues as well as the issue of new debt or the redemption of existing debt. The Group’s overall capital risk management policy remains unchanged from 2007 .

Èëëèê ùåñàáàò / Annual report

110

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
39. RISK MANAGEMENT POLICIES
QManagement of risk is fundamental to the Group’s banking business and is an essential element of the Group’s operations. The main risks inherent to the Group’s operations are those related to: • Credit exposures • Liquidity risk • Market risk The Group recognizes that it is essential to have efficient and effective risk management processes in place. To enable this, the Group has established a risk management framework, whose main purpose is to protect the Group from risk and allow it to achieve its performance objectives. Through the risk management framework, the Group manages the following risks:

Credit risk The Group is exposed to credit risk which is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. Risk management and monitoring is performed within set limits of authority, by the Credit Committees and the Group’s Management Board. Before any application is made by the Credit Committee, all recommendations on credit processes (borrower’s limits approved, or amendments made to loan agreements, etc.) are reviewed and approved by the experts of Credit Department. Daily risk management is performed by the Head of Credit Department and Branch. The Group structures the level 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 industry (and geographical) segments. Limits on the level of credit risk by a borrower and a product are approved quarterly by the Management Board. The exposure to any one borrower including banks and brokers is further restricted by sub-limits covering on and off-balance sheet exposures which are set by the Credit Committee. Actual exposures against limits are monitored daily. Where appropriate, and in the case of most loans, the Group obtains collateral and corporate and personal guarantees certain portion of loans is personal lending, where no such facilities can be obtained. Such risks are monitored on a continuous basis and subject to monthly reviews. Commitments to extend credit represent unused portions of credit in the form of loans, guarantees or letters of credit. The credit risk on off-balance sheet financial instruments is defined as a probability of losses due to the inability of counterparty to comply with the contractual terms and conditions. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to a loss in an amount equal to the total unused commitments. However, the likely amount of the loss is less than the total unused commitments since most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Group applies the same credit policy to the contingent liabilities as it does to the balance sheet financial instruments, i.e. the one based on the procedures for approving the grant of loans, using limits to mitigate the risk, and current monitoring. The Group monitors the term to maturity of off balance sheet contingencies because longer term commitments generally have a greater degree of credit risk than short-term commitments.

111

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
Maximum Exposure The Groups maximum exposure to credit risk varies significantly and is dependant on both individual risks and general market economy risks. The following table presents the maximum exposure to credit risk of balance sheet and off balance sheet financial assets. For financial assets in the balance sheet, the maximum exposure is equal to the carrying amount of those assets prior to any offset or collateral. For financial guarantees and other off balance sheet assets, the maximum exposure to credit risk is the maximum amount the Group would have to pay if the guarantee was called on or in the case of commitments, if the loan amount was called on. As at 31 December 2008:
31 December 2008 Maximum exposure Net exposure after offset Collateral Pledged Net exposure after offset and collateral 41,871 23,728 11,346 3,000 1,550

Due from banks Loans to customers Investments available-for-sale Investments held to maturity Other financial assets

41,871 252,462 11,346 3,000 1,550

41,871 252,462 11,346 3,000 1,550

– 228,734 – – –

As at 31 December 2007:
31 December 2007 Maximum exposure Net exposure after offset Collateral Pledged Net exposure after offset and collateral 10 38,471 3,602 22,417 1,419

Financial assets at fair value through profit or loss Due from banks Loans to customers Investments available-for-sale Other financial assets

10 38,471 158,044 22,417 1,419

10 38,471 158,044 22,417 1,419

– – 154,442 – –

Financial assets are graded according to the current credit rating they have been issued by an internationally regarded agency such as Standard and Poors. The highest possible rating is AAA. Investment grade financial assets have ratings from AAA to BBB. Financial assets which have ratings lower than BBB are classed as speculative grade.

Èëëèê ùåñàáàò / Annual report

112

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 (Continued)
(in Azerbaijan Manats and in thousands)
The following table details the credit ratings of financial assets held by the Group as at 31 December 2008:
31 December 2008 AAA AA A BBB…...

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