«Тинькофф Банк». Консолидированная финансовая информация (2018 год)

TCS Group Holding PLC
Notes to the Consolidated Financial Statements – 31 December 2018

Administrative and Other Operating Expenses (Continued)

The total fees charged by the Company's statutory auditor for the statutory audit of the annual consolidated
and separate financial statements of the Company for the year ended 31 December 2018 amounted to
RR 2.7 million (2017: RR 2.1 mln). The total fees charged by the Company's statutory auditor for the year
ended 31 December 2018 for other assurance services amounted to RR 4.7 million (2017: RR 3.8 million),
for tax advisory services amounted to RR 5.7 million (2017: RR 1.1 million) and for other non-assurance
services amounted to nil (2017: RR 1.7 million).

Included in staff costs are statutory social contributions to the non-budget funds and statutory pension
contributions and share-based remuneration:

In millions of RR

2018

2017

Statutory social contribution to the non-budget funds and statutory pension

contributions

2,582

1,721

Share-based remuneration

630

1,037

The average number of employees employed by the Group during the reporting year, including those who
are working under civil contracts, was 21,577 (2017: 15,391).

Other Operating Income

In millions of RR

2018

2017

Income from marketing services

2,060

956

Subrogation fee

122

Other

788

223

Total other operating income

2,970

1,220

Income Taxes

Income tax expense comprises the following:

In millions of RR

2018

2017

Current tax

4,639

5,479

Deferred tax

3,463

483

Total income tax expense

8,102

5,962

The income tax rate applicable to the majority of the Group’s income is 20% (2017: 20%). The operations
of the Group are subject to multiple tax jurisdictions. The income tax rate applicable to the Russian
subsidiaries of the Company is 20%. The income tax rate applicable to the Company registered in Cyprus
is 12.5% (2017: 12.5%).

TCS Group Holding PLC
Notes to the Consolidated Financial Statements – 31 December 2018

Income Taxes (Continued)

A reconciliation between the expected and the actual taxation charge is provided below.

In millions of RR

2018

2017

Profit before tax

35,224

24,985

Theoretical tax expense at statutory rate of 20% (2017: 20%)

7,045

4,997

Tax effect of items, which are not deductible or assessable for taxation
purposes:

- Non-deductible expenses

311

370

- Other including dividend tax

740

549

Unrecognised tax losses

177

Effects of different tax rates:

- Income on government securities taxed at different rates

(165)

- Results of companies of the Group taxed at different statutory rates

(6)

Income tax expenses for the year

8,102

5,962

Differences between IFRS and taxation regulations in Russia and other countries give rise to temporary
differences between the carrying amount of assets and liabilities for financial reporting purposes and their
tax bases. As all of the Group’s temporary differences arise in Russia, the tax effect of the movements in
these temporary differences is detailed below and is recorded at the rate of 20% (2017: 20%).

In the context of the Group’s current structure and Russian tax legislation, tax losses and current tax assets
of different group companies may not be offset against current tax liabilities and taxable profits of other
group companies and, accordingly.

Therefore, deferred tax assets and liabilities are offset only when they relate to the same taxable entity and
the same taxation authority.

In millions of RR

31 December

2017

(Charged)/

credited to

profit or loss

Credited

directly to

equity

Credited to

OCI

31 December

2018

Tax effect of deductible and taxable

temporary differences

Loans and advances to customers

223

(1,636)

2,109

696

Tangible fixed assets

(344)

(257)

(601)

Intangible assets

(312)

(285)

Revaluation of debt investment at

FVOCI

(327)

(827)

667

(487)

Revaluation of debt investment at

FVTPL

Accrued expenses and other

temporary differences

(199)

(919)

345

(773)

Customer accounts

(30)

(21)

Debt securities in issue

(55)

(40)

Financial derivatives

(435)

111

(324)

Insurance provisions

Net deferred tax liabilities

(1,479)

(3,463)

2,454

667

(1,821)

TCS Group Holding PLC
Notes to the Consolidated Financial Statements – 31 December 2018

Income Taxes (Continued)

In millions of RR

31 December

2016

(Charged)/cre

dited to profit

or loss

Charged

to OCI

31 December

2017

Tax effect of deductible and taxable temporary

differences

Loans and advances to customers

318

(95)

223

Tangible fixed assets

(246)

(98)

(344)

Intangible assets

(353)

(312)

Revaluation of investment securities available for sale

and repurchase receivables

(140)

(211)

(327)

Securities at fair value through profit or loss

(1)

Accrued expenses and other temporary differences

226

(425)

(199)

Customer accounts

(39)

(30)

Debt securities in issue

(11)

(44)

(55)

Financial derivatives

(544)

109

(435)

Insurance provisions

(5)

Net deferred tax liabilities

(785)

(483)

(211)

(1,479)

Dividends

The movements in dividends during the year are as follows:

In millions of RR

2018

2017

Dividends payable at 1 January

377

167

Dividends declared during the year

12,265

8,279

Dividends paid during the year

(11,946)

(7,970)

Dividends paid under MLTIP after vesting date

(144)

(29)

Foreign exchange loss on dividends payable

208

(70)

Dividends payable at 31 December

760

377

Dividends per share declared during the year (in USD)

1.07

0.77

Dividends per share paid during the year (in USD)

1.07

0.77

Dividends declared during the year for the year ended 31 December 2018 in the table above represent
dividends declared by the Board of Directors during the year ended 31 December 2018 decreased by
RR 11 million of dividends on GDRs acquired by the Company from the market not for the purposes of
existing MLTIP.

On 25 November 2018 the Board of Directors declared an interim dividend of RR 18.39 (USD 0.28) per
share/per GDR amounting to RR 3,358 million (USD 51.1 million). Declared dividends were paid in USD in
December 2018.

On 27 August 2018 the Board of Directors declared an interim dividend of RR 16.27 (USD 0.24) per
share/per GDR amounting to RR 2,972 million (USD 43.9 million). Declared dividends were paid in USD in
September 2018.

On 29 May 2018 the Board of Directors declared an interim dividend of RR 14.95 (USD 0.24) per share/per
GDR amounting to RR 2,730 million (USD 43.8 million). Declared dividends were paid in USD in June 2018.

On 9 March 2018 the Board of Directors declared an interim dividend of RR 17.61 (USD 0.31) per share/per
GDR amounting to RR 3,216 million (USD 56.6 million). Declared dividends were paid in USD in April 2018.

TCS Group Holding PLC
Notes to the Consolidated Financial Statements – 31 December 2018

Dividends (Continued)

On  19  November  2017  the  Board  of  Directors  of  the  Group  declared  an  interim  dividend  of  RR  13.12
(USD 0.22)  per  share/per  GDR  amounting  to  RR  2,396  million  (USD 40.2  million).  At  the  same  date  a
special  interim  dividend  of  RR  10.73  (USD  0.18)  per  share/per  GDR  amounting  to  RR  1,960  million
(USD 32.9) million was declared. Declared dividends were paid in USD in December 2017.

On 28 August 2017 the Board of Directors of the Group declared an interim dividend of RR 11.83
(USD 0.20) per share/per GDR amounting to RR 2,161 million (USD 36.5 million). Declared dividends were
paid in USD in September 2017.

On 29 May 2017 the Board of Directors of the Group declared a dividend of RR 9.65 (USD 0.17) per
share/per GDR amounting to RR 1,762 million (USD 31.05 million). Declared dividends were paid in USD in
June 2017.

Dividends were declared and paid in USD throughout the years ended 31 December 2018 and 2017.

Dividends payable at 31 December 2018 related to treasury shares acquired under MLTIP amounting to
RR 760 million are included in other non-financial liabilities (2017: RR 377 million).

Reconciliation of liabilities arising from financing activities

The table below sets out an analysis of the Group’s debt and the movements in the Group’s debt for each
of the periods presented. The debt items are those that are reported as financing in the consolidated
statement of cash flows.

Liabilities from financing activities

In millions of RR

Debt securities

in issue

Perpetual

subordinated

bonds

Other

subordinated

debt

Total

Net debt at 1 January 2017

2,986

11,514

14,500

Cash flows

7,819

17,109

(6,623)

18,305

Issue costs

(256)

Foreign exchange adjustments

262

(106)

156

Other non-cash movements

101

115

Net debt at 31 December 2017

10,819

17,115

4,886

32,820

Cash flows

(1,803)

(49)

(5,209)

(7,061)

Foreign exchange adjustments

580

3,553

382

4,515

Other non-cash movements

(59)

(25)

Net debt at 31 December 2018

9,605

20,644

30,249

Segment Analysis

Operating segments are components that engage in business activities that may earn revenues or incur
expenses, whose operating results are regularly reviewed by the chief operating decision maker (CODM)
and for which discrete financial information is available. The CODM is the person or group of persons who
allocates resources and assesses the performance for the Group. The functions of CODM are performed
by the Management of the Bank and the Management of the Insurance Company.

TCS Group Holding PLC
Notes to the Consolidated Financial Statements – 31 December 2018

Segment Analysis (Continued)

Description of products and services from which each reportable segment derives its revenue

The Group is organised on the basis of 4 main business segments:

Retail banking – representing customer current accounts, savings, deposits, investment savings
products, custody, credit and debit cards, consumer loans and brokerage services to individuals.

SME accounts services – representing customer current accounts, savings, deposits services to
individual entrepreneurs and small to medium businesses.

Insurance operations – representing insurance services provided to individuals.

MVNO services - providing mobile services for both current Group’s customers and others.

Factors that management used to identify the reportable segments

The Group’s segments are strategic business units that focus on different services to the customers of the
Group. They are managed separately because each business unit requires different marketing strategies
and represents different types of businesses.

Measurement of operating segment profit or loss, assets and liabilities

The CODM reviews financial information prepared based on International financial reporting standards
adjusted to meet the requirements of internal reporting. The CODM evaluates performance of each
segment based on profit before tax.

Information about reportable segment profit or loss, assets and liabilities

Segment reporting of the Group’s assets and liabilities as at 31 December 2018 is set out below:

In millions of RR

Retail

banking

SME

accounts

services

Insurance

operations

MVNO

services

Elimina-

tions

Total

Cash and cash equivalents

19,621

13,110

3,537

(2,481)

33,802

Mandatory cash balances with the CBRF

2,435

Due from other banks

776

Loans and advances to customers

199,513

330

386

(1,740)

198,489

Financial derivatives

1,710

Investments in debt securities

68,375

30,394

1,371

100,140

Repurchase receivables

1,182

Guarantee deposits with payment systems

4,603

Current income tax assets

1,104

Tangible fixed assets

8,280

8,369

Intangible assets

3,214

547

264

198

4,223

Other financial assets

15,316

173

542

(435)

15,642

Other non-financial assets

2,344

618

150

(88)

3,024

Total reportable segment assets

327,697

44,554

7,494

498

(4,744)

375,499

Due to banks

2,708

Customer accounts

242,092

41,702

1,344

(4,222)

280,916

Debt securities in issue

9,605

Financial derivatives

Current income tax liabilities

Deferred income tax liabilities

1,821

Subordinated debt

20,644

Insurance provisions

2,859

Other financial liabilities

9,746

1,711

213

(469)

11,201

Other non-financial liabilities

3,367

(53)

3,441

Total reportable segment liabilities

290,037

41,702

4,633

1,621

(4,744)

333,249

TCS Group Holding PLC
Notes to the Consolidated Financial Statements – 31 December 2018

Segment Analysis (Continued)

Segment reporting of the Group’s income and expenses for the year ended 31 December 2018 is set out
below:

In millions of RR

Retail

banking

SME

accounts

services

Insurance

operations

MVNO

services

Elimina-

tions

Total

Revenues

Interest income calculated using the

effective interest rate method

73,105

1,807

250

(121)

75,041

Other similar income

456

Fee and commission income:

- SME current accounts commission

6,943

- Credit protection fee

5,601

- Merchant acquiring commission

4,202

(40)

4,162

- Interchange fee

2,595

451

3,046

- SMS fee

2,256

- Foreign currency exchange transactions

fee

1,576

209

1,785

- Card to card commission

1,279

- Cash withdrawal fee

885

- Mortgage agency fee

419

- Brokerage operations

210

- Income from MVNO services

239

(53)

186

- Placement fee

167

- Marketing services fee

108

- Other fees receivable

393

(17)

376

Timing of fee and commission income

recognition:

- At point in time

17,435

7,385

239

(110)

24,949

- Over time

2,256

218

2,474

Total fee and commission income

19,691

7,603

239

(110)

27,423

Net gains/(losses) from operations with

foreign currencies

(6)

(2)

Net gains from disposals of debt securities

at FVOCI

457

(79)

378

Insurance premiums earned

320

6,665

(311)

6,674

Net gain from repurchase of subordinated

debt

Other operating income

2,784

202

(59)

2,970

Total revenues

96,808

9,449

7,135

241

(680)

112,953

Interest expense calculated using the

effective interest rate method

(14,377)

(800)

(50)

121

(15,106)

Expenses on deposit insurance

(1,090)

(84)

(1,174)

Credit loss allowance for loans and

advances to customers

(11,574)

(33)

(11,607)

Credit loss allowance for debt securities at

FVOCI

(192)

Fee and commission expense

(9,434)

(1,125)

(246)

(10,751)

Customer acquisition expense

(10,012)

(2,429)

(772)

(254)

367

(13,100)

Net losses from debt instruments at FVTPL

(808)

Insurance claims incurred

(1,968)

Administrative and other operating

expenses

(18,896)

(2,370)

(1,002)

(814)

(23,023)

Segment result

30,425

2,608

3,393

(1,123)

(79)

35,224

TCS Group Holding PLC
Notes to the Consolidated Financial Statements – 31 December 2018

Segment Analysis (Continued)

Segment reporting of the Group’s assets and liabilities as at 31 December 2017 is set out below:

In millions of RR

Retail

banking

SME

accounts

services

Insurance

operations

Elimina-

tions

Total

Cash and cash equivalents

16,741

6,067

1,850

(808)

23,850

Mandatory cash balances with the CBRF

1,675

Due from other banks

256

521

777

Loans and advances to customers

140,245

Financial derivatives

2,424

Investment securities available for sale

53,974

17,500

202

71,676

Repurchase receivables

798

Current income tax assets

301

Guarantee deposits with payment systems

3,660

Tangible fixed assets

6,138

6,140

Intangible assets

2,391

370

295

3,056

Other financial assets

10,514

604

(162)

10,969

Other non-financial assets

3,084

208

(35)

3,257

Total reportable segment assets

242,201

23,950

3,682

(1,005)

268,828

Due to banks

595

Customer accounts

156,148

23,705

(808)

179,045

Debt securities in issue

10,819

Financial derivatives

240

Current income tax liabilities

Deferred income tax liabilities

1,429

1,479

Subordinated debt

22,001

Insurance provisions

1,840

Other financial liabilities

8,103

102

(162)

8,043

Other non-financial liabilities

2,808

(35)

2,796

Total reportable segment liabilities

202,168

23,705

2,015

(1,005)

226,883

Segment reporting of the Group’s income and expenses for the year ended 31 December 2017 is set out
below:

In millions of RR

Retail

banking

SME

accounts

services

Insurance

operations

Elimina-

tions

Total

Revenues

Interest income calculated using the effective interest
rate method

58,294

945

116

(38)

59,317

Other similar income

224

Fee and commission income:

- SME current accounts commission

3,003

- Credit protection fee

4,211

- Merchant acquiring commission

2,686

(270)

2,416

- Interchange fee

1,540

143

1,683

- SMS fee

1,341

- Foreign currency exchange transactions fee

911

992

- Card to card commission

555

- Cash withdrawal fee

606

- Mortgage agency fee

100

- Brokerage operations

- Placement fee

167

- Other fees receivable

397

(27)

370

TCS Group Holding PLC
Notes to the Consolidated Financial Statements – 31 December 2018

Segment Analysis (Continued)

In millions of RR

Retail

banking

SME

accounts

services

Insurance

operations

Elimina-

tions

Total

Timing of fee and commission income recognition:

- At point in time

11,260

3,166

(297)

14,129

- Over time

1,341

1,402

Total fee and commission income

12,601

3,227

(297)

15,531

Net gains from investment securities available for sale

270

Insurance premiums earned

2,742

(7)

2,735

Other operating income

1,140

(4)

1,220

Total revenues

72,529

4,181

2,933

(346)

79,297

Interest expense calculated using the effective interest
rate method

(12,441)

(421)

(12,824)

Expenses on deposit insurance

(612)

(29)

(641)

Provision for loan impairment

(7,614)

Fee and commission expense

(5,192)

(426)

(5,618)

Customer acquisition expense

(7,770)

(1,588)

(665)

304

(9,719)

Net losses from operations with foreign currencies

(251)

(5)

(256)

Net losses from repurchase of subordinated loan

(619)

Insurance claims incurred

(815)

Administrative and other operating expenses

(14,718)

(879)

(613)

(16,206)

Segment result

23,312

838

835

24,985

Depreciation charges for the year ended 2018 included in administrative and other operating expenses in
the amount of RR 801 million and RR 1 million (2017: RR 415 million and RR 2 million) relate to the Bank
and to the Insurance Company, correspondingly. Amortisation for 2018 included in the administrative and
other operating expenses in the amount of RR 761 million and RR 64 million (2017: RR 403 million and
RR 62 million) relate to the Bank and to the Insurance Company, correspondingly.

Reconciliation of reportable segment revenues, profit or loss, assets and liabilities

In millions of RR

2018

2017

Total revenues for reportable segments

113,633

79,643

Intercompany transactions

(680)

(346)

Total consolidated revenues

112,953

79,297

Total consolidated revenues comprise interest income calculated using the effective interest rate method,
other similar income, fee and commission income, net gains from operations with foreign currencies, net
gains from disposals of debt securities at FVOCI, insurance premiums earned and other operating income.

In millions of RR

2018

2017

Total reportable segment result

35,224

24,985

Profit before tax

35,224

24,985

TCS Group Holding PLC
Notes to the Consolidated Financial Statements – 31 December 2018

Segment Analysis (Continued)

In millions of RR

31 December

2018

31 December

2017

Total reportable segment assets

380,243

269,833

Intercompany balances

(4,744)

(1,005)

Total consolidated assets

375,499

268,828

In millions of RR

31 December

2018

31 December

2017

Total reportable segment liabilities

337,993

227,888

Intercompany balances

(4,744)

(1,005)

Total consolidated liabilities

333,249

226,883

Financial Risk Management

The risk management function within the Group is carried out with respect to financial risks, operational
risks and legal risks by the management of the Bank and Insurance Company. Financial risk comprises
market risk (including currency risk, interest rate risk and other price risk), credit risk and liquidity risk. The
primary function of financial risk management is to establish risk limits and to ensure that any exposure to
risk stays within these limits. The operational and legal risk management functions are intended to ensure
the proper functioning of internal policies and procedures in order to minimize operational and legal risks.

Credit risk.

The Group exposes itself to credit risk, which is the risk that one party to a financial instrument

will cause a financial loss for the other party by failing to meet an obligation. Exposure to credit risk arises
as a result of the Group’s lending and other transactions with counterparties giving rise to financial assets.
The Group grants retail loans and SME to customers across all regions of Russia, therefore its credit risk
is broadly diversified. The management of the Group takes special measures to mitigate growing credit risk
such as decreasing of credit limits for unreliable clients, diversifying of modes of work with overdue
borrowers, toughening of scoring for the new borrowers etc., giving rise to financial assets and off-balance
sheet credit-related commitments. The Group grants retail loans to customers across all regions of Russia,
therefore its credit risk is broadly diversified. The management of the Group takes special measures to
mitigate growing credit risk such as decreasing of credit limits for unreliable clients, diversifying of modes
of work with overdue borrowers, toughening of scoring for the new borrowers etc.

The Group’s maximum exposure to credit risk is reflected in the carrying amounts of financial assets in the
consolidated statement of financial position. For financial guarantees issued, commitments to extend credit,
undrawn credit lines, the maximum exposure to credit risk is the amount of the commitment (Note 36).

The Bank created a credit committee, which establishes general principles for lending to individual
borrowers. According to these principles, the minimum requirements for potential customers are listed
below:

Citizenship of the Russian Federation;

Age from 18 to 70, but not older than 70 y.o. at the time of loan repayment;

Availability of a cell-phone;

Permanent employment;

Permanent income.

TCS Group Holding PLC
Notes to the Consolidated Financial Statements – 31 December 2018

Financial Risk Management (Continued)

For cash loans, minimum requirements are listed below:

The requested loan term is from 3 to 36 months;

Cash loan volumes range between RR 50 thousand and RR 2,000 thousand.

For POS loans minimum requirements are listed below:

The requested loan amount should exceed RR 3 thousand;

The requested loan term is from 3 to 36 months;

The amount of one POS loan does not exceed RR 100 thousand.

For secured loans minimum requirements are listed below:

The requested loan secured with a car amount should be between RR 100 thousand and
RR 3,000 thousand, loan term is from 3 months to 5 years. The requirement for the car is in good
condition of driving with an age not more than 15 years;

The requested loan secured with a real estate amount should be between RR 200 thousand and
RR 15,000 thousand, loan term is from 3 months to 15 years. The requirement for the real estate is
an apartment in the apartment building within the Russian Federation, and is free from any
encumbrances.

For car loans minimum requirements are listed below:

The requested loan term is from 1 to 5 years;

Car loan volumes range between RR 100 thousand and RR 1,000 thousand;

The requirement for the car is with an age not more than 18 years.

For loans to SME minimum requirements are listed below:

The requested loan term is from 6 to 36 months;

Car loan volumes range between RR 50 thousand and RR 2,000 thousand;

A credit decision process includes:

Validation of the application data. The system checks the validity of the data provided (addresses,
telephone numbers, age, if the applicant already uses any other products of the Bank);

Phone verification of the application information about the potential customer, his/her employment,
social and property status, etc. This step may be omitted for POS loans;

Requesting of the previous credit history of the applicant from the three largest credit bureau in
Russia – Equifax, UCB (United Credit Bureau) and NBCH (National Bureau of Credit Histories).

Based on all available information, the credit score of the applicant is calculated and a final decision
is made about the approval of the credit product;

The approved loan amount, loan term and tariff plan are calculated depending on the score and
declared income.

Management of the Group manages the credit risk on unused limits on credit cards in the following way:

if the credit card loan is overdue for more than 7 days, its account will be blocked till repayment;

if the borrower had lost his/her source of income, then borrower account might be blocked till
verification of his/her new employment;

if borrower’s loan debt burden in other banks is substantially bigger than at the time of loan origination
or the credit quality of the borrower decreases significantly then the borrower’s limit for credit might
be reduced accordingly.

TCS Group Holding PLC
Notes to the Consolidated Financial Statements – 31 December 2018

Financial Risk Management (Continued)

When a customer experiences serious difficulties with his/her current debt servicing, he/she may be offered
loan restructuring. In this case the Bank stops accrual of interest, commissions and fines and the debt
amount is restructured according to a fixed instalment payment plan with not more than 36 equal monthly
payments. Another way of working with overdue loans is initiation of the state court process. This collection
option statistically gives greater recovery than the sale of credit-impaired loans. Defaulted clients that could
be subject to the court process are chosen by the Bank’s Collection Department considering the following
criteria:

the client’s account balance was fixed, accrual of interest stopped;

information about the client is considered to be up to date;

the client denied restructuring program;

term of limitation of court actions has not expired;

court process is economically justified.

When  loans  become  unrecoverable  or  not  economically  viable  to  pursue  further  collection  efforts,  the
Collection  Department  may  decide  to  sell  these  loans  to  a  debt  collection  agency.  The  Collection
Department  considers  the  following  criteria  for  credit-impaired  loans  qualifying  for  sale  to  external  debt
collection agencies:

loans remain unpaid after all collection procedures were performed (no payment during last 4-6
months);

the debtor cannot be either reached or found for the previous 4 months;

the debtor has no assets and there is no expectation he/she will have any in the future;

the debtor has died and there is no known estate or guarantor;

it is determined that it is not cost effective to continue collection efforts.

Credit risk grading system

. For measuring credit risk and grading financial instruments except for loans

and advances to customers by the level of credit risk, the Group applies risk grades estimated by external
international rating agencies in case these financial instruments have risk grades estimated by external
international rating agencies (using Fitch ratings and in case of their absence - Moody’s or Standard &
Poor’s ratings adjusting them to Fitch’s categories using a reconciliation table):

Master scale credit risk grade

Corresponding ratings of external international rating

agency (Fitch)

Current

AAA to BB+

Monitor

BB to B+

Sub-standard

B, B-

Doubtful

CCC+ to CC-

Default

C, D-I, D-II

Each master scale credit risk grade is assigned a specific degree of creditworthiness:

Current

– strong credit quality with low expected credit risk;

Monitor

– adequate credit quality with a moderate credit risk;

Sub-standard

– moderate credit quality with a satisfactory credit risk;

Doubtful

– facilities that require closer monitoring and remedial management; and

Default

– facilities in which a default has occurred.

TCS Group Holding PLC
Notes to the Consolidated Financial Statements – 31 December 2018

Financial Risk Management (Continued)

For measuring credit risk and grading loans and advances to customers, credit related commitments and
those financial instruments which do not have risk grades estimated by external international rating
agencies, the Group applies risk grades and the corresponding range of probabilities of default (PD):

Master scale credit risk grade

Corresponding interval

Current

Non-overdue

Monitor

1-30 days overdue for all types of loans or without first due

date for credit card loans

Sub-standard

31-90 days overdue or restructured loans 0-90 days overdue

NPL

90+ days overdue

Each master scale credit risk grade is assigned a specific degree of creditworthiness:

Current

– strong credit quality with low expected credit risk;

Monitor

– adequate credit quality with a moderate credit risk and credit cards loans before the first

due date;

Sub-standard

– low credit quality with a substantial credit risk, includes restructured loans that are

less than 90 days overdue;

NPL

– non-performing loans, credit-impaired loans more than 90 days overdue.

The rating models are regularly reviewed by the Credit Risk Department, backtested on actual default data
and updated if necessary. Despite the method used, the Group regularly validates the accuracy of ratings
estimates and appraises the predictive power of the models.

Expected credit loss (ECL) measurement – definitions and description of estimation techniques.
ECL

is a probability-weighted estimate of the present value of future cash shortfalls (i.e., the weighted

average of credit losses, with the respective risks of default occurring in a given time period used as
weights). ECL measurement is based on the following components used by the Group:

Default

occurs when a financial asset is 90 days past due or less than 90 days overdue but with the final

statement issued, i.e. the limit is closed, the balance is fixed, interest and commissions are no longer
accrued.

Probability of Default (PD)

– an estimate of the likelihood of default to occur over a given time period.

Exposure at Default (EAD)

– an estimate of exposure at a future default date, taking into account expected

changes in exposure after the reporting date, including repayments of principal and interest, and expected
drawdowns on committed facilities.

Loss Given Default (LGD)

– an estimate of the loss arising on default as a percentage of the EAD. It is

based on the difference between the contractual cash flows due and those that the Group would expect to
receive.

Discount Rate

– a rate to discount an expected loss to its present value at the reporting date. The discount

rate represents the effective interest rate (EIR) for the financial instrument or an approximation thereof.

Lifetime period

– the maximum period over which ECL should be measured. For loans with fixed maturity,

the lifetime period is equal to 20 months. For revolving facilities it is based on statistics of the average
period between the moment of the loan falling into the Stage 2 until the write-off or attrition. Currently the
Group estimates that this period equals to 4 years, though it is subject to periodical reassessment.

Lifetime ECL –

losses that result from all possible default events over the remaining lifetime period of the

financial instrument.

12-month ECL

– the portion of lifetime ECLs that represent the ECLs resulting from default events on a

financial instrument that are possible within 12 months after the reporting date that are limited by the
remaining contractual life of the financial instrument.

TCS Group Holding PLC
Notes to the Consolidated Financial Statements – 31 December 2018

Financial Risk Management (Continued)

Forward looking information –

the information that includes the key macroeconomic variables impacting

credit risk and expected credit losses for each portfolio segment. A pervasive concept in measuring ECL in
accordance with IFRS 9 is that it should consider forward-looking information.

Credit Conversion Factor (CCF) –

a coefficient that shows that the probability of conversion of an off-

balance sheet amount to exposure on the consolidated statement of financial position within a defined
period. It can be calculated for a 12-month or lifetime period. Based on the analysis performed, the Group
considers that 12-month and lifetime CCFs are the same.

Purchased or originated credit-impaired (POCI) financial assets

- financial assets that are credit-impaired

upon initial recognition.

Default and credit-impaired assets

– assets for which a default event has occurred.

The default definition stated above should be applied to all types of financial assets of the Group.

An instrument is considered to no longer be in default (i.e. to have “cured”) when it no longer meets any of
the default criteria.

Significant increase in credit risk (SICR) -

the SICR assessment is performed on an individual basis for all

financial assets by monitoring the triggers stated below. The criteria used to identify SICR are monitored
and reviewed periodically for appropriateness by the Group’s Risk Management Department.

The Group considers a financial instrument to have experienced a SICR when one or more of the following
quantitative, qualitative or backstop criteria have been met.

For interbank operations, bonds issued by banks and bonds issued by corporates and sovereigns:

30 days past due;

award of risk grade “Doubtful”;

decrease of assigned external rating by 2 notches, which corresponds to an approximate increase
of PD by 2.5 times.

For credit card loans:

30 days past due; or

threshold defined on an individual basis using existing scoring models: increase of the 12-month PD
compared to 12-month PD estimated 18 months ago or as of the date of initial recognition (if it
occurred less than 18 months ago) by 3 times or PD reaching 50% and above.

For all other loans:

30 days past due; or

if the loans were past due for more than 30 days during the last 6 months or if the loans fell past due
during the last 4 months more than once.

If the SICR criteria are no longer met, the instrument will be transferred back to Stage 1.

General principle of techniques applied

For non-POCI financial assets, ECLs are generally measured based on the risk of default over one of two
different time periods, depending on whether or not the credit risk of the borrower has increased significantly
since initial recognition.

This approach can be summarised in a three-stage model for ECL measurement:

Stage 1 – a financial instrument that is not credit-impaired on initial recognition and its credit risk has
not increased significantly since initial recognition, the loss allowance is based on 12-month ECLs;

TCS Group Holding PLC
Notes to the Consolidated Financial Statements – 31 December 2018

Financial Risk Management (Continued)

Stage 2 – if since the date, which was assumed to be the date of initial recognition is identified a
SICR, the financial instrument is moved to Stage 2 but is not yet deemed to be credit-impaired, the
loss allowance is based on lifetime ECLs;

Stage 3 – if the financial instrument is credit-impaired or restructured, the financial instrument is then
moved to Stage 3 and the loss allowance is based on lifetime ECLs.

ECL for POCI financial assets is always measured on a lifetime basis (Stage 3), so at the reporting date,
the Group only recognises the cumulative changes in lifetime expected credit losses.

The Group carries out two separate approaches for ECL measurement:

for loans and advances to customers: assessment on a portfolio basis: internal ratings are estimated
on an individual basis but the same credit risk parameters (e.g. PD, LGD) are applied during the
process of ECL calculations for the same credit risk ratings and homogeneous segments of the loan
portfolio;

for all other financial assets except FVTPL: assessment based on external ratings.

The Group performs an assessment on a portfolio basis for the retail loans. This approach incorporates
aggregating the portfolio into homogeneous segments based on borrower-specific information, such as
delinquency, the historical data on losses and other.

Principles of assessment on portfolio basis –

to assess the staging of exposure and to measure a loss

allowance on a collective basis, the Group combines its exposures into segments on the basis of shared
credit risk characteristics, such as that exposures to risk within a group are homogeneous.

Examples of shared characteristics include: type of customer, product type, credit risk rating, date of initial
recognition, overdue level and repayment statistics.

The different segments reflect differences in PD. The appropriateness of groupings is monitored and
reviewed on a periodic basis by the Risk Management Department.

In general, ECL is the multiplication of the following credit risk parameters: EAD, PD and LGD (definitions
of the parameters are provided above). The general approach used for ECL calculation is stated below.

where:

ܲܦ

௧

೔

– probability of default in moment ݐ

௜

(can’t be higher than 100%);

ܧܣܦ

௧

೔

- exposure at default in moment ݐ

௜

;

ܮܩܦ

௧

೔

- loss given default in moment ݐ

௜

;

௜

– number of months in the loan’s lifetime;

ܧܫܴ – effective interest rate;

ܰ – remaining amount of payments.

The ECL is determined by predicting credit risk parameters (EAD, PD and LGD) for each future month
during the lifetime period for each exposure or segment. These three components are multiplied together.
This effectively calculates an ECL for each future month, which is then discounted back to the reporting
date and summed up. The discount rate used in the ECL calculation is the effective interest rate or an
approximation thereof.

TCS Group Holding PLC
Notes to the Consolidated Financial Statements – 31 December 2018

Financial Risk Management (Continued)

The EADs are determined based on the expected payment profile, on an individual basis. For revolving
products, the EAD is predicted by taking the current withdrawn balance and adding a “credit conversion
factor” that accounts for the expected drawdown of the remaining limit of utilised loans by the time of default.
These assumptions vary by product type, current limit utilisation and other borrower-specific behavioral
characteristics. For other products EAD is equal to current exposure as there is no credit limit to utilize.

Two types of PDs are used for calculating ECLs: 12-month and lifetime PD:

12-month PDs – the estimated probability of a default occurring within the next 12 months. This
parameter is used to calculate 12-month ECLs. An assessment of a 12-month PD is based on the
latest available historic default data using borrower-specific behavioural characteristics and adjusted
for forward-looking information when appropriate. Based on borrower-specific PDs the exposures
are allocated to segments to which average PD for the segment is applied.

Lifetime PDs – the estimated probability of a default occurring over the remaining life of the financial
instrument. This parameter is used to calculate lifetime ECLs for Stage 2 and Stage 3 exposures. An
assessment of a lifetime PD is based on the latest available historic default data using product
specific lifetime periods defined above. To calculate Lifetime PD, the Group developed lifetime PD
curves based on the 12-month PD data.

LGD represents the Group's expectation of the extent of loss on a defaulted exposure. For credit card loans,
cash loans and POS loans LGDs are calculated on portfolio basis based on recovery statistics of defaulted
loans over the period of 24 or 36 months. For secured loans, car loans and loans to SME LGDs are
calculated using current market data in relation to the expected recoveries.

ECL measurement for loan commitments.

The ECL measurement for these instruments includes the same

steps as described above for on-balance sheet exposures and differs with respect to EAD calculation. The
EAD is a product of credit conversion factor (“CCF”) and amount of the commitment. CCF for undrawn
credit limits of credit cards and overdrafts is defined based on statistical analysis of exposures at default.

Principles of assessment based on external ratings –

the principles of ECL calculations based on external

ratings are the same as for their assessment on a portfolio basis. Credit risk parameters (PD and LGD) are
taken from the default and recovery statistics published by international rating agencies (Fitch and in case
of their absence - Moody’s or Standard & Poor’s).

Forward-looking information incorporated in the ECL models.

The calculation of ECLs incorporates forward-

looking information. The Group has performed historical analysis and identified the key economic variables
impacting credit risk and ECLs for each portfolio. The list of variables:

Russian stock market index MOEX;

Debt load of Russian population based on statistics from bureaus of credit history.

The  impact  of  these  economic  variables  on  the  ECL  has  been  determined  by  performing  statistical
regression analysis in order to understand the way how changes in these variables historically impacted
default  rates.  Three  different  scenarios  are  used:  base,  optimistic  and  pessimistic.  The  scenarios  are
weighted  accordingly  with  base  scenario  having  the  highest  weight  and  with  optimistic  and  pessimistic
scenarios having approximately equal weights. If a 100% weight is applied to any of the scenarios the effect
on the ECL shall not be material.

Backtesting –

the Group regularly reviews its methodology and assumptions to reduce any difference

between the estimates and the actual loss of credit. Such backtesting is performed on a quarterly basis.

The results of backtesting the ECL measurement methodology are communicated to Group Management
and further steps for refining models and assumptions are defined after discussions between authorised
persons.

Market risk.

The Group takes on exposure to market risks. Market risks of the Group arise from open

positions in (a) currency and (b) interest rate, both of which are exposed to general and specific market
movements. Management sets limits on the value of risk that may be accepted, which is monitored on a
daily basis. However, the use of this approach does not prevent losses outside of these limits in the event
of more significant market movements.

TCS Group Holding PLC
Notes to the Consolidated Financial Statements – 31 December 2018

Financial Risk Management (Continued)

Currency risk.

In respect of currency risk, the management sets limits on the level of exposure by currency

and in total for both overnight and intra-day positions, which are monitored daily.

The table below summarizes the Group’s exposure to foreign currency exchange rate risk at the end of the
year:

At 31 December 2018

At 31 December 2017

In millions of

Non-

derivative

monetary

financial

assets

Non-

derivative

monetary

financial

liabilities

Derivatives

Net

position

Non-

derivative

monetary

financial

assets

Non-

derivative

monetary

financial

liabilities

Derivatives

Net

position

307,617

(264,073)

(5,283)

38,261

220,246

(174,842)

(10,200)

35,204

USD

37,550

(47,539)

7,245

(2,744)

26,082

(40,046)

13,565

(399)

Euro

11,318

(13,773)

(233)

(2,688)

6,837

(5,851)

(1,186)

(200)

GBP

571

(586)

(22)

(37)

485

(487)

Others

(202)

(189)

Total

357,069

(326,173)

1,707

32,603

253,650

(221,226)

2,184

34,608

Derivatives  presented  above  are  monetary  financial  assets  or  monetary  financial  liabilities,  but  are
presented  separately  in  order  to  show  the  Group’s  gross  exposure.  Amounts  disclosed  in  respect  of
derivatives represent the fair value, at the end of the reporting period, of the respective currency that the
Group agreed to buy (positive amount) or sell (negative amount) before netting of positions and payments
with the counterparty. The amounts by currency are presented gross as stated in  Note 38. The net total
represents the fair value of the currency derivatives. The above analysis includes only monetary assets
and liabilities.

The following table presents sensitivities of profit or loss and equity to reasonably possible changes in
exchange rates applied at the end of the reporting period, with all other variables held constant:

At 31 December 2018

At 31 December 2017

In millions of RR

Impact on

profit or loss

Impact on

equity

(pre-tax)

Impact on

profit or loss

Impact on

equity

(pre-tax)

USD strengthening by 20% (2017: by 20%)

(549)

(80)

USD weakening by 20% (2017: by 20%)

549

Euro strengthening by 20% (2017: by 20%)

(538)

(40)

Euro weakening by 20% (2017: by 20%)

538

GBP strengthening by 20% (2017: by 20%)

(7)

GBP weakening by 20% (2017: by 20%)

(1)

The exposure was calculated only for monetary balances denominated in currencies other than the
functional currency of the respective entity of the Group.

Interest rate risk.

The Group takes on exposure to the effects of fluctuations in the prevailing levels of

market interest rates on its financial position and cash flows. Interest margins may increase as a result of
such changes but may reduce or create losses in the event that unexpected movements arise. Management
monitors on a daily basis and sets limits on the level of mismatch of interest rate repricing that may be
undertaken.

«Тинькофф Банк». Консолидированная финансовая информация (2018 год) - часть 6