Joint Stock Company PNB BANKA

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Joint Stock Company “PNB BANKA”
Consolidated and Separate Financial statements prepared in accordance with International Financial Reporting Standards as adopted by the European Union for the year ended 31 December 2018 and independent auditor’s report

Report of the Supervisory Council and the Management Board Consolidated Non-financial Statement Supervisory Council and Management Board Statement of Management’s Responsibilities Consolidated and Separate Financial Statements:
Consolidated and Separate Income Statement Consolidated and Separate Statement of Comprehensive Income Consolidated and Separate Statement of Financial Position Consolidated Statement of Changes in Equity Separate Statement of Changes in Equity Consolidated and Separate Cash Flow Statement Notes to the Consolidated and Separate Financial Statements
Independent auditor’s report

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Dear Shareholders, Clients and Partners!
2018 was a year of turbulence and change in the Latvian market. After the release of the FinCEN report on AB.LV Bank in February 2018, there was significant pressure on the banking sector. Coupled with 4-5 months of political uncertainty as to what would change in the regulatory basis around AML, the first half of 2018 was very stressful for our clients and our employees. The second half of 2018 was less turbulent; the Bank implemented an updated AML strategy; reviewed and revised its entire customer portfolio based on this; reinforced its Latvian business strategy (a focus on Seniors and the underbanked); and rebranded. All of these tasks were organically implemented, well communicated and ensured that our customers were well served throughout.
In 2018 the Bank’s net operating income was 35.4 million euro (in 2017: 44.5 million euro), but net profit was 1.1 million euro (in 2017: losses 43.9 million euro). In comparison with the previous year the Bank’s net operating income decreased by 9.1 million euro (20.4%).
Latvian and Global Economy
The Latvian economy continued to outperform the EU in 2018. GDP growth was markedly higher than the EU average at 4.9% (versus an average of 1.4%). Irrespective of the aforementioned turbulence in the market, the non-financial sectors performed well, with increases in exports of timber products, base metal products, means of transport, food industry products, transport services (both air transport and railway transport services), information and communication services. The impact of Brexit has been felt, but not as strongly as initially expected. Inflation rates were as expected at 2.6%, and are forecast to remain stable at this rate.
2018 saw significant changes to the tax legislation in Latvia. Though this was not welcomed by business, the impact to the economy (and to the State Budget) has, again, been less than forecasted.
2019 is forecast to be another calm year in terms of key economic indicators, with tax policy and Brexit impacts to be less than forecast in 2017. At the same time, however, there is stagnation in foreign direct investment (2018: 237 million euro, 2017: 386 million euro), and if this continues then the longterm economic forecast may have to take a step-down.
The AML Challenge
2018 saw significant turbulence in the market, surrounding issues related to money laundering. Further to the AB.LV scandal in February 2018, further AML crises in Estonia and the neighbouring states ensured that the focus for the Bank’s management throughout 2018 was AML. The key task coming out of this was a full review of the customer portfolio, focusing on the International Business segment initially, and ensuring that it was of a high level of quality to meet new legislative requirements that were brought in in May 2018. Aside from the client review (which continued through to September 2018), the Bank also had to re-work its strategy and defend this with the Latvian regulator (the Financial and Capital Markets Commission, the “FCMC”).
The Bank has seen such challenges before, and with an understanding of the potential reduction in customer flows, the Bank began a cost optimization process that led to a cost saving of 9.1% in compared to the initially planned. However, this was not at the expense (sic) of the systems and personnel in risk or control management.
The Bank pays special attention to AML training of its employees and provided both internal and external training for its employees including international ACAMS certification.

In late 2017 the Management Team had taken the decision to re-brand the Bank in early 2018. However, with turbulence surrounding the AB.LV scandal in February 2018, opacity on regulatory changes through to May 2018, and then general elections in October 2018, the Bank decided to rebrand as PNB Banka in November 2018. There is no specific meaning of the three letters “P”, “N”, “B”, but we like to think that we’ve taken the best of our past with us (“NB – Norvik Banka”), and added something new (“P – People, Personable”). A more personable, friendlier Bank with the same great products and services.
Latvian Banking
Though the AML Challenge was focused on our International Business customers, the efforts of our Latvian Banking team were not reduced. In 2018 we continued developing our Senior segment strategy, with the goal of becoming the number one bank for Seniors and the underbanked in Latvia. In cooperation with the Latvian Pensioners’ Federation, the Bank took part in a number of workshops, seminars, and lectures on banking services for the Senior segment, and helped to improve the level of financial education in this customer group.
The Bank currently employs 12 Seniors in the branch network, and they are a valuable customer service team, and provide some of the most effective front-line feedback.
2018 was a centenary jubilee for the Latvian Republic, and as part of these celebrations, the Bank also congratulated 10 centenarians on their birthdays throughout the year.
Branch Network
The Bank continued to optimise its branch network by opening new or redesigning existing customer service centres in accordance with the bank’s new interior design concept, and new brand. At the end of the reporting period, there were 44 customer service centres and branches.
Winergy - Business
SIA Winergy continues to service the loans issued to the company and since becoming part of the Group has repaid 1.4 million euro. The Bank continues to treat this asset as “For Sale”, and has a number of interested buyers. However, in September 2018, and in early 2019, the government has indicated that it will remove feed-in tariffs from green energy electricity providers. Though this does not impact the forecast financials significantly, investment appetite has been reduced. The sale of the asset will have a significant impact on the Bank / Group balance sheet and will make it possible to significantly reduce the risk assets and increase the Bank / Group capital adequacy ratio.
Winergy - Legal
The criminal case, wherein seven persons were accused of large-scale fraud in connection with the implementation of SIA Winergy project, was forwarded to the court at the beginning of 2018. The Bank is recognized as a victim in a criminal case.
The Bank’s international investment claim against the Republic of Latvia
On 12 December 2017, the Bank and its controlling shareholders (the Claimants) filed an arbitration claim, under the UK-Latvia bilateral investment treaty, against the Republic of Latvia at the International Centre for Settlement of Investment Disputes (ICSID). ICSID, which is a part of the World

Bank Group and has been established to resolve international investment disputes between investors and States. The Claimants commenced the arbitration to obtain compensation for the unfair, arbitrary, and unreasonable regulation of the Bank by the FCMC in violation of the Latvia’s obligations under international law.
An ICSID Tribunal was initially constituted in July 2018 to consider the claims lodged by the Claimants. It was, however, reconstituted on 29 September 2018 following Latvia’s challenge to the arbitrator appointed by the Claimants. The Tribunal has to date addressed a number of preliminary matters that have arisen in the proceedings. The Tribunal heard argument in December 2018 on the Claimants’ application for interim relief and Latvia’s application for bifurcation of the proceedings. Both decisions are pending. In due course, the Tribunal will adopt a final decision on the merits of the Claimants’ case based on international law. This decision will be binding and immediately enforceable. The Claimants’ attempts to negotiate a settlement with Latvia, both prior to, and after the filing of the claim, have been unsuccessful. The Claimants still hope to reach a mutually acceptable settlement agreement with Latvia. The arbitration in no way affects the Bank’s performance plans.
Reputation Risk Management
In October 2018 Sigma Ratings Inc. announced its first-ever Sigma Rating for a Latvian banking institution: PNB Banka achieved a rating outlook of BB+ (Stable), which places it within reach of the “Industry Leader” segment (BBB and above).
By means of this independent rating on financial crime vulnerability and governance, PNB Banka is demonstrating the differentiated strength of its compliance controls and efforts to uphold global financial transparency standards.
Sigma assessed the Bank’s financial crime risk as “MODERATE” with control effectiveness as “ESTABLISHED”. The rating notes that the bank broadly has strong financial crime controls in place and has made considerable progress in strengthening its risk posture. The Bank is the first Latvian bank to receive a rating of this kind.
Participation in Events and Conferences
The Bank continues to be the face of Latvian banking in the International Business segment; talking part in seminars and conferences across the CIS, with a focus on Moscow and Kiev. In 2018, the Bank’s senior team attended Intax Expo, Intax Private Capital Forum, Intax Forum Ukraine, WealthPro, InvestPro, Business aviation club and "Level Up" (Deloitte) conferences in Moscow, Kiev, Almaty and Limassol (Cyprus).
However, the most interesting conference was in Riga – the Bank was a major sponsor for the Digital Freedom Festival in late November 2018. The Bank hosted several discussions during the Festival, with a focus on blockchain technologies, cryptocurrencies, modern financial technologies and cybersecurity.
Pension fund management business
Tier II pension fund management business (AS Norvik Ieguldījumu Pārvaldes Sabiedrība, PNB Asset Management (PNB.AM)) continued to evolve successfully, however the number of clients dropped by almost 2 thousand persons.
The number of members of pension plans managed by PNB.AM was 81 445 persons (as of 31 December 2017 – 83 319 persons), while the amount of assets under its management increased up to 135.83 million euro (in 2017 – 134.73 million euro).

ПАО "Норвик Банк" (Russian Federation)
In 2017, the Bank concluded an agreement for the sale of ПАО "Норвик Банк" (Russian Federation), as a result of which in 2018 the Group lost control over the subsidiary. This transaction was concluded within the framework of the policy of the Group aimed at the reduction of exposure in the Russian Federation. The sale of the subsidiary resulted in a significant reduction in the Group's capital requirements, and, as a result, improved the Group's capital adequacy ratio.
Financial results
The Bank’s main balance sheet figures are as follows: • total assets as of 31 December 2018 was 569.5 million euro, a decrease of 219.6 million euro comparing to the indicators of as of 31 December 2017, which was mainly determined by the outflow of client’s deposits; • the clients’ loan portfolio at the end of 2018 amounted to 179.2 million euro (a 34.4 million euro decrease year-on year); • the liquidity ratio at the end of the reporting period reached 64.61% (as of 31 December 2017 – 61.33%).
The Bank follows a liquidity management strategy that provides a high rate of return balanced for the risk assumed, whilst purposefully maintaining significantly higher than the minimum required level of reserves (the minimum required liquidity ratio is 50.00%).
From the Bank’s income statement, key highlights are as follows:
• net interest income in 2018 decreased to 2.9 million euro comparing with 7.3 million euro in 2017, following a reduction in the balance sheet of the Bank;
• net fee and commission income remained at last year level of 21.9 million euro;
• in 2018 impairment gain on loans and investments were recognized in amount of 2.4 million euro (in 2017 impairment losses were 51.9 million euro), that includes reverse of impairment losses on financial assets in amount of 3.0 million euro.
Thus, the Bank’s net profit before tax in 2018 was 1.6 million euro (comparing to losses in amount of 43.3 million euro in 2017).
The remuneration to the Bank’s sworn auditor SIA PricewaterhouseCoopers in the reference year was calculated in the amount of 617 thousand euro, in particular:
- audit of the annual report – 320 thousand euro;
- non-audit fees – 297 thousand euro.
The amount of remuneration of members of the Council and the Board, as well as the total amounts of transactions concluded with the Bank are given in Notes 40 to this report. The Bank has no obligations related to pension payments to the former members of the Board and the Council.
The Bank’s total comprehensive losses during the reporting period was 16 800 thousand euro, while comprehensive losses accumulated during the previous periods were 70 201 thousand euro. As regards shares/equity, reported numbers for 2018, based on audited data irrespective of qualification, are as follows:
• the Bank’s capital adequacy ratio as of 31 December 2018 was 12.48% compared to 14.24% in December 2017 and the minimum regulatory requirements in the amount of 14.00%;

Business Model
PNB Banka (the “Bank”) is a Latvian universal bank with approximately 100 000 customers, of which 96% are Latvian residents, while the remaining 4% are international customers. The Bank provides a full range of services to both of its customer segments, from ensuring daily utilities payments to complex financial products, including insurance products offered in cooperation with the Bank’s partners.
In 2018, the Bank proceeded with the implementation of its previously adopted strategy by focusing greater attention on the Latvian business segment, and on the servicing of senior customers in particular. It is a customer segment where we are aware of our competitive advantage, supported by the largest customer service network in Latvia and knowledge of the financial needs of senior customers acquired over the years.
The Bank offers financial solutions to everyone that needs them, irrespective of their financial position, social status or age. The Bank cares for those customers that need financial guidance the most, and whose financial needs are not always understood and met by other banks. The Bank does this by offering a wide range of products, adapted to its customer’s needs and thus raising their standard of living.
The Bank respects each client – from those looking to use a modern internet bank and mobile phone applications to those that feel safer when settling daily money matters at a branch in the way and in the language that they understand. While other banks optimise their resources and limit their face-toface accessibility, the Bank is able to provide services to customers in the most customer-friendly manner, paying diligent attention to their habits and needs; a large number of people still choose to carry out their financial transactions in person.
In 2018, the Bank proceeded with the modernisation of its customer service centres to ensure that the design would be attractive to customers and provide an even more convenient service. To improve face-to-face availability of the Bank’s services and paying due attention to customer convenience, the Bank still has a large branch network, with 44 customer service centres throughout Latvia.
The Bank services the following client segments: private retail customers; corporate retail customers; municipalities; international retail and corporate customers; VIP customers. The Bank offers the following products to its customers: current accounts; internet bank; credit and debit cards (also premium-level); customer service sets (bundled product offering); 2nd pension pillar funds management; investment products; securities trading services; currency exchange; cash operations; transaction banking (both local and international); short-term lending products; trade finance solutions; guarantee services; brokerage services; marginal trading; safety deposit boxes, as well as a wide range of partners’ offers provided on more advantageous terms. During 2018, new insurance products were introduced, such as OCTA, Zaļā karte (Green Card), health insurance and sport insurance.
In 2018, the Bank started cooperation with Air Baltic, under which it granted loans to Air Baltic Pilot Academy’s students aspiring to become the company’s future pilots for them to cover their tuition fees. Taking into account the fact that the tuition fee of the training course “Integrated Airline Transport Pilots” in Latvia for one student costs EUR 69 thousand, the Bank has offered the students the best and most favourable terms of lending.
Cooperation with the municipalities segment is also worth noting separately – in 2018, cooperation was started with and accounts were opened for 28 municipalities. In total, the Bank is already cooperating successfully with 30 municipalities, ensuring mainly incoming Real Estate Property Tax payments. In 2018, cooperation with Jelgava City Council was started regarding the introduction of a

Citizen Card. Currently, using the Bank’s Citizen Card, Jelgava’s citizens have the possibility to receive subsidies offered by the municipality and a more favourable price for using public transport in the city. Moreover, a number of municipality companies started successful cooperation and opened accounts with the Bank. Cooperation with the Rezekne Social Service has also been established, under which the citizens of Rezekne have the possibility to receive municipality allowances at the Bank’s Rezekne branch in cash or via payment transfer to their bank account.
In continuation of servicing of its core customer group, i.e. Latvian seniors, in 2018 the Bank developed products specifically for these clients’ needs, e.g. consumer loans to seniors, allowing them to receive additional funds at the age of up to 80 years old, as well as health insurance for seniors.
In 2018, the Bank changed the operational model of its contact centre, turning to a more pro-active customer servicing model and providing customers with the possibility to apply for certain banking services remotely, e.g. insurance products or the customer service bundles most appropriate for the customer.
Additionally, in 2018 cooperation with a number of strategic partners was started. To expand the Bank’s services for legal entities and ensure the acceptance of cards in points-of-sale, a cooperation agreement with Nets was concluded. Nets is one of the largest providers of card transaction processing services in Europe. Moreover, in autumn 2018, the Bank joined the Credit Information Office’s database to assess its clients’ creditworthiness, promote fair borrowing and motivate customers to fulfil their debt obligations.
At the end of 2018, there was a significant event in the bank’s operation – on 09 November, Norvik Banka changed its name to PNB Banka. The change of the Banks’ name was the next logical stage in the development of the Bank following on from the change of the strategy, focus on Latvian Banking, and strengthening of the management team. In the new name PNB Banka, the Bank added a new value – a “P”erson because a person, personal service and a human-touch, is and will be the Bank’s priority. Along with the change of the name, the Bank demonstrated once again its availability to everyone who appreciates the most advantageous financial services that are most adequate to their needs. The key values of the Bank’s business did not change – the Bank continues to provide financial services to everyone without distinction as to the customer’s wealth, status or age.
In parallel with the introduction of the new name, the Bank improved its customer servicing process by introducing new quality standards at all levels of the Bank’s operations, including employee trainings.
The change of the Bank’s name to PNB Banka will be implemented across the branch network gradually throughout 2019.
The second major line of business is International Business. 2018 was not an easy year for the Latvian banking sector in this segment. Changes in the regulatory requirements and legislation significantly restricted the possibility to work with international customers and specifically those with “shell” companies. These changes, though welcome, have substantially reduced the international customer share in the Latvian banking sector.
The International Business is aimed at large corporate clients and private persons with high level of incomes that has fully adapted to the new reality. During the last years, the Bank has fully complied with the policy of refusing service to high-risk customers. The work of the International Business is fully guided by the standards of OECD, FATF, as well as the legislation of the Republic of Latvia in the sphere of the prevention of money laundering and terrorism financing. The Bank complies with not only Latvian and European AML requirements, but also with the standards of the US Bank Secrecy Act and the best global practice of working with international customers.

The Bank provides a full range of banking services for its international business customers, both legal entities and individuals, and the Bank offers: opening and servicing of multi-currency accounts; 24/7 remote services; multi-currency money transfers; a wide choice of payment cards; term deposits; investment services; brokerage; asset purchase and sale transactions; private banking and more.
The Bank regularly participates in CIS and European business conferences, organised by large event operators such as Deloitte, Bosco-Conference, Intax-Group, CIS Wealth and others.
Sharing Competence
At the beginning of the 2nd quarter of 2018, the Bank started a partnership with Forbes Latvia by contributing a column ‘Story of Experienced Entrepreneur’, the aim of which is to provide useful business advice to the younger generation of entrepreneurs by senior entrepreneurs that are ready to share their experience and inspire. Within the framework of this cooperation 12 entrepreneurs in video interviews shared their business philosophy, achievements and mistakes to encourage the potential business starters to strive for and attain their own goals. In 2018, four interviews were created; the cooperation will continue in 2019 as well.
In the 2nd quarter of 2018, the Chairman of the Board of the Bank led a guest lecture cycle at Riga Business School, during which students were told about topical issues in the financial sphere, reacting to the developments in the banking sector in Latvia and what consequences it may have to individual banks and the services they provide, as well as about international trends in the financial sector. In 2019 the guest lecture cycle will continue.
May 2018 was important to the banks because on May 25, 2018 the General Data Protection Regulation (GDPR) came into force. The Bank organised a seminar to which its corporate customers were invited with the aim to explain the last nuances regarding the introduction of GDPR. The Data Protection Officer of the Bank participated in the meeting of the Data Protection Advisory Support Council established by the Government of Latvia, during which many issues regarding the application of GDPR in reality were discussed. In the autumn of 2018, at the meeting organised by the Ministry of Justice and the Finance Latvia Association to exchange experience, the Bank’s Data Protection Officer met officials of the National Centre for the Personal Data Protection of Moldova, to share experience regarding the introduction of personal data protection rules in banking.
In the 3rd quarter of 2018, the Bank conducted a survey on payment habits in society, and it showed that most of the seniors aged 60-85 use payment cards in their everyday life, but that only slightly over half (55%) recognise them as their main payment means. The survey identified that the seniors who prefer settlements in cash were concerned that their money could disappear from the card or be wrongly debited at the moment of payment. To encourage seniors to use a modern means of payment, in August and September 2018 the Bank, in cooperation with Mastercard, launched an educational campaign aimed at educating the seniors about the use of digital services and payment cards. The Bank invited the children of the seniors to get involved and help them learn how to use this convenient form of payment, while the branches of the Bank invited seniors to learn how to use the internet bank.
In the 4th quarter of 2018, the Chairman of the Board of the Bank gave a presentation “Blockchains as the Instrument of Trust” at the conference “Cryptocurrency & Blockchains: Where is the Money?” organised by the magazine “Kapitāls”. Around 200 participants attended the conference – opinion leaders, business leaders, regulators and consultants, looking to learn more about topics such as cryptocurrencies and find out what the possibilities of blockchain technology are and which businesses are using it already.

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Joint Stock Company PNB BANKA