Tinkoff
Annual Report 2019

Plain-text annual report

CONTENTS TCS GROUP IS RUSSIA’S LEADING PROVIDER OF ONLINE FINANCIAL AND LIFESTYLE SERVICES VIA ITS TINKOFF ECOSYSTEM. STRATEGIC REVIEW DIRECTORS’ REVIEW About us . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Board of directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 2019 Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Tinkoff group: decision making bodies at a glance . . . . . . . . 48 Our history . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Corporate governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Business model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Management team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Market context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Market position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 FINANCIALS Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 What makes us different? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 CEO strategic review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 International Financial Reporting Standards Consolidated Financial Statements and Independent Auditor’s Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1 Our recent awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 CFO financial review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 International Financial Reporting Standards Separate Financial Statements and Independent Auditor’s Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-119 Asset, liability and risk management . . . . . . . . . . . . . . . . . . . . 28 Corporate social responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . 38 GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G-1 Employees and corporate social responsibility . . . . . . . . . . . 44 INVESTOR INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G-3 TCS Group or Tinkoff (or the Group) are the names used in this Report for TCS Group Holding PLC and its group of companies operating under the Tinkoff brand in Russia. These include Tinkoff Bank and Tinkoff Insurance. Summary of presentation of financial and other information. All financial information in this document is derived from the financial statements of TCS Group Holding PLC and has been prepared in accordance with International Financial Reporting Standards as adopted by the European Union and the requirements of Cyprus Companies Law, Cap 113, which are for the year ended 31 December 2019 included in this document. A detailed description of the presentation of financial and other information is set out after page 63 of this document. Market data used in this document, including statistics in respect of market share, have been extracted from official and industry sources TCS Group Holding PLC believes to be reliable and is sourced where it appears. Such information, data and statistics may be approximations or estimates. Some of the market data in this document has been derived from official data of Russian government agencies, including the CBRF, Rosstat and the FSFM. Data published by Russian federal, regional and local governments are substantially less complete or researched than those of Western countries. Certain statements and/or other information included in this document may not be historical facts and may constitute “forward looking statements”. The words “believe”, “expect”, “anticipate”, “intend”, “estimate”, “plan”, “forecast”, “project”, “will”, “may”, “should” and similar expressions may identify forward looking statements but are not the exclusive means of identifying such statements. Forward looking statements include statements concerning our plans, expectations, projections, objectives, targets, goals, strategies, future events, future revenues, operations or performance, capital expenditures, financing needs, our plans or intentions relating to the expansion or contraction of our business as well as specific acquisitions and dispositions, our competitive strengths and weaknesses, our plans or goals relating to forecasted operations, reserves, financial position and future operations and development, our business strategy and the trends we anticipate in the industry and the political, economic, social and legal environment in which we operate, together with the assumptions underlying these forward looking statements. We do not make any representation, warranty or prediction that the results anticipated by such forward looking statements will be achieved. Nothing in this document constitutes an invitation to invest in securities of TCS Group. COVID-19 The existence of COVID-19 was confirmed in early 2020 and has spread across China, to Russia and beyond, causing disruptions to businesses and economic activity. Governments in affected countries are imposing travel bans, quarantines and other emergency public safety and fiscal measures. Those measures, though temporary in nature, may continue and increase depending on developments in the virus’ outbreak. The Group has put contingency plans in place both to protect the workforce and ensure that we mitigate the impact of COVID 19. For instance, currently, our employees are mainly working from home due to travel restrictions imposed by governments. The ultimate severity of the Covid-19 outbreak is uncertain at this time, and therefore the Group cannot reasonably estimate the impact it may have on future operations. However, our technology systems continue to operate to the high levels we demand and the Group has high levels of both liquidity and capital reserves. Therefore, the Directors have concluded that there is currently no material impact on the Group’s operations and liquidity at the time of publication of this report as a result of COVID-19. 1 №1 BEST IN MOBILE BANKING IN CENTRAL AND EASTERN EUROPE * by Global Finance 2019 THE LEADING LIFESTYLE AND FINANCIAL SERVICES ECOSYSTEM Daily banking Small business • Debit cards • Business account Savings & Investments • Credit products • Salary projects • Payments • Overdraft • P2P transfers • Business loans • Deposits • Securities • Pensions Real Estate • Insurance • Valuation • Legal support • Utility bills, taxes • Utilities payments • Accounting • Investment strategy • Rent payments Mobile • Own number • Own mobile network code • Own SIM cards Auto • Fines • Insurance • Auto loans Insurance Entertainment • Cars • Travel • Property • Health • Life • E-commerce • Ticketing • Restaurant reservations • Stories • Travel ONE CLICK LIFESTYLE BANKING WITH YOUR MOBILE PHONE №1 Consumer Digital Bank in CEE* 19mn downloads 1.8mn daily active users 101mn sessions per month 5.6mn monthly active users *Source: Global Finance 2 3 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019PROVEN TRACK RECORD OF DRIVING SUSTAINABLE GROWTH HIGHLIGHTS OUR HISTORY Growth Profitability HIGHLIGHTS OF TCS GROUP’S INNOVATIVE DEVELOPMENT • 3 million acquired customers, reaching 10 .3 million . • Record high net income of RUB 36 .2 billion, growing 31% • Loan book growth of 66% in 2019, powered by the suc- cessful scaling up of new, non-credit card products • Highest ever engagement growth on our mobile app: reached DAU of 1 .8m and MAU 5 .6m at YE19 . • Exponential growth of our retail brokerage platform, opening >1m accounts in 2019 • Retail current accounts growth of 54% YoY ., amounting YoY, with industry leading ROAE of 55 .9% • Tinkoff’s net income CAGR of 49% in 2016-19 exceeded ambition provided in 2016 of 20-40% annual growth Capital Markets • Listed our GDRs on the Moscow Stock Exchange on October 28 . 4 .8 billion secured lending portfolio to BB with Stable Outlook to a record 51% of total customer accounts . New business lines • Raised $300m of equity in an oversubscribed deal • Raised RUB 20bn in Rub bonds to fund our growing • Tinkoff Investments reached break even in July 2019 • Moody’s rating upgraded to Ba3 stable from B1 stable . • Share of non-credit cards in the loan book portfolio at a • Tinkoff Business recorded record high net income of RUB • Fitch upgraded our Long-term FX and RUB rating from BB- historic high of 39%, with secured lending accounting for 15% of the total loan book 2019 • 31 December 2019 CBRF N1 statutory capital ratio of 12 .1% and Basel III Common Equity Tier 1 at 15 .9% Liquidity and capitalisation • Treasury portfolio of RUB135bn of highly liquid CBRF • Total assets up by 55% to RUB 581bn, with cash and • Launched Russia’s and Europe’s first Super App • Total equity up by 127% to RUB 96 .1 bn Insurance revenues doubled in 2019 treasury portfolio up at RUB193bn repoable bonds • Customer accounts 411.6 RUBbn Total assets 579.5 RUBbn ROE 2019 55.9 % Net profit 36.1 RUBbn N1.0 at the end of 2019 New credit customers 12.1 % +1.6 mn NET PROFIT (RUBBN) 36.1 2019 • Launch of the first "Super App" in Russia and Europe • Raised $300m in equity financing • Introduction of Oleg, the world's first voice assistant for financial and lifestyle tasks • Increased equity stake in Cloudpayments from 55% to 95% • Started offering for sale to third parties the proprietary Tinkoff VoiceKit 2017–2018 46.1 • Acquisition of a stake in Kassir .ru to enrich our lifestyle • Launch of a virtual development hub, eleventh IT-hub of offering Tinkoff • A multi-currency platform launched accommodating up to 30 currencies • Full brokerage and depositary services license obtained • Launch of Tinkoff Junior app, a service for children and teenagers • Launched Cyprus-based home call centre • Home equity loans pilot started • Launch of Tinkoff Mobile • Roll-out of own ATM’s across Russia • Acquisition of a 55% stake in CloudPayments • Launch of Stories for mobile app • Launch of Tinkoff Property • A partnership with Skolkovo Innovation Center announced • Tinkoff Bank was admitted to membership in the FinTech Association 2014–2016 16.3 • Launched a network of software development hubs coun- trywide, the first in St Petersburg Introduced a face recognition system for scoring • Joined the Russian blockchain consortium • • Launched a new management long term incentive plan • One of the first launching Apple Pay and Samsung Pay in Russia • Acquired parts of Svyaznoy Bank’s credit card portfolios • Became Russia’s second largest credit card provider • Launched a range of new business lines, transitioning to online financial marketplace Tinkoff .ru Issued new co-branded cards • • New brand - Tinkoff Bank • Launch of a series of co-branded cards • Launch of a number of mono mobile applications 2010–2013 11.8 • TCS Group IPO on the London Stock Exchange Main Market • Launch of Tinkoff Insurance • Launch of cash loans • Minority stakes sold to Baring Vostok and Horizon • Launch of online POS loan programme Launch of mobile banking • • Launch of the mobile and telesales sub-channels of Tink- off Bank online customer acquisition platform • Launch of online acquisition channel for credit cards • Launch of “smart courier” service 2006–2009 -0.6 • Launch of the retail deposit programme • First debit card issued • Minority stakes sold to Goldman Sachs and Vostok Nafta • Launch of internet bank • First credit card issued • Tinkoff Credit Systems Bank was created by Oleg Tinkov 4 5 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019BUSINESS MODEL OPERATING FLEXIBILITY TCS Group has built an advanced platform that is highly suit- ed for the Russian market and operating environment . The Group’s platform is entirely branchless, with a low fixed cost base and high degree of operating flexibility . Cost efficien- cies are enhanced by its best-in-class centralised IT system, with continued investments and advancements in the field of artificial intelligence and machine learning . The low level of retail financial services penetration in Russia, the rapid growth of online and mobile payments, and high margins and barriers to entry make our business model attractive in terms of sustainable profitability, growth potential and competitive edge . ROBUST DATA AND RISK MANAGEMENT TCS Group employs a highly scientific, data-driven and conservative risk management approach, which underpins the success of the business model . All aspects of the client life cycle – from acquisition to services and collections – are carefully monitored and evaluated . We make loan approval decisions based on a range of available information, includ- ing credit bureau data, a rigorous application verification process and proprietary scoring models . HIGH LIQUIDITY AND DIVERSIFIED FUNDING BASE Tinkoff has established a robust liquidity risk management framework that ensures it maintains sufficient liquidity, including a significant cushion of liquid assets . TCS Group’s funding strategy provides effective diversification in the sources and tenor of funding . The Group maintains strong relationships with market participants to promote effective diversification of funding sources . DIVERSIFIED PROVIDER OF RETAIL FINANCIAL, INSURANCE AND QUASI- FINANCIAL SERVICES Originally the first purpose-built credit card focused lender in Russia, Tinkoff has evolved into a focused online financial su- permarket living in the cloud, providing a full range of its own retail financial services such as retail lending, transactional, savings products, insurance, SME, internet acquiring, securi- ties dealing, mobile solutions as well as non-Tinkoff products through the full-cycle brokerage model . Tinkoff continues to operate in the mass market segment, and focuses on ex- panding the mass affluent segment by way of offering an ever expanding range of financial services and targeted lifestyle recommendations, advice and entertainment features . TCS GROUP’S RAPIDLY EVOLVING CLOUD BUSINESS MODEL IS SCALABLE WELL BEYOND FINANCIAL SERVICES. COMBINED WITH A SMART BALANCE SHEET AND A BEST IN CLASS BROKER PLATFORM SOLUTION IT GIVES THE BIGGEST COMPETITIVE ADVANTAGE IN A RAPIDLY DEVELOPING FINTECH MARKET POWERFUL DISTRIBUTION Tinkoff offers remote access customer service through its award-winning mobile banking as well as through internet banking and high-volume call centres . Our use of direct marketing channels has revolutionised the way customers are acquired in Russia . Distribution channels, which include online (the Internet, mobile services and telesales), direct mail and direct sales agents, allow TCS Group to attract new customers right across the country . Supporting the branch- less platform is a “smart courier” network which allows next day delivery . PREMIUM-LEVEL SERVICE AND BRAND TCS Group is unusual among Russian retail financial services providers in offering a premium-level service to mass market and mass affluent customers . Our customers enjoy conven- ient 24 hours a day, 7 days a week access to their accounts and financial transaction services through the combination of Tinkoff’s free mobile, Internet and call centre service platforms . Tinkoff is an online financial supermarket offering customers the full range of financial, transactional, and lifestyle services . Through our mobile and internet platforms we offer Tink- off-branded products – credit products, current accounts, deposits, cash loans, securities dealing, insurance and mobile solutions, as well as non-Tinkoff products through our full-cycle brokerage . For small businesses, we offer current accounts, transactional services, credit products salary projects and on- line merchant acquiring . We deliver premium services to mass market and mass affluent customers in Russia through a unique online, branchless platform . 6 7 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 MARKET CONTEXT MARKET POSITION Retail lending In 2019, retail lending continued to demonstrate high growth . This was particularly noticeable in the first half of the year . Despite macroeconomic stability, early signs of consumer lev- eraging and regulatory tightening by the Central Bank of Russia led to a decline in growth rates towards the end of 2019 . In fact, the CBR not only introduced further risk-weight increases in an attempt to cool the market down, but also developed a new PTI (payment-to-income) regulation which required more capital to be held against loans to more indebted parts of the population . State banks and a few sizeable private players, including Tinkoff, continued to take market share in this growing market . In Tink- off's case, a key contributor to this was the successful scaling up of Tinkoff secured lending portfolio (home equity and car loans) which had been in test phase throughout 2018 . This portfolio is expected to continue growing even taking into account the CBR's increasing efforts to regulate the market, given that these products have low penetration and are highly innovative . Credit business In 2019 Tinkoff further cemented its position as the number 2 credit card player in Russia after Sberbank . But most remarkable has been its growth in the overall retail credit market (loans < 3 years) where now Tinkoff is the second player in Russia with a 7 .6% market share, overtaking VTB . De- spite a normalization in risk costs from overly positive dynamics in 2018, Tinkoff's credit business remains extremly profitable and will continue to contribute to customer growth in future years . Credit card market in Russia (RUBbn) Market dynamics in 2019 (RUBbn) Tinkoff market share as of 1 January 2020 89 14 1595 95 87 1310 -7.2 95.1 26.6 58.2 292.2 285.0 112.3 2018 Q1 Q2 Q3 Q4 2019 Sberbank Tinkoff Bank Alfa Bank Other banks Total growth Total contraction Market IN 2019 THE CREDIT CARD LENDING SECTOR IN RUSSIA GREW BY 21.8% Source: CBRF #2 #6 #6 #7 #15 #11 #21 #21 #2 13.3 7.6 4.9 2.6 2.0 2.0 Credit cards Retail loans up to 3 years IE* current accounts Retail current accounts Retail loans Car loans *IE - individual entrepreneuers **Legal entities including individual entrepreneuers Source: RAS reporting from www.cbr.ru 1.1 Retail customer accounts 0.4 0.4 Legal Legal entities** entities** current current accounts accounts Transactional business In 2019, Tinkoff opened 2 .6 million debit card accounts to reach 7 .1 million . Tinkoff Black remains the main feeder for Tinkoff ecososteym growth and feeds cross-sell potential . This prod- uct is key in accessing a younger and more mass affluent customer base: the average user is 34 years old and predominantly urban . These cus- tomers have shown higher propensity to utilize more of the Tinkoff product suite - and Tinkoff Black is a key feeder for our Tinkoff Invest- ments, Insurance, Credit Card, SME business lines . The Tinkoff Black debit card is also the main tool to access Tinkoff's increasingly com- prehensive array of lifestyle services - including ticketing, entertainment, and e-commerce - services that Tinkoff provides itself and often in conjunction with partners . Household debt continued to grow in 2019 while NPLs were improving A leader in the mobile financial and lifestyle solutions in Russia 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% The share of mobile internet users in Russia is growing year-on-year . Tinkoff being a leader in the mobile space from its very first day continues to pay a close attention to not only interfaces and seamlessness of processes in its mobile application but also hugely invests into customer satisfaction and retention . The launch of our Super-App at the end of 2019 is the latest evolution of the Tinkoff platform - it not only aggregates all of the Tinkoff Group produts under one umbrella, but seamlessly allows customers to satisfy their daily banking, credit, transactional, and lfiestyle needs . The app is complemented by Stories – targeted AI based tips based on customer’s transaction activity, restaurant reservations, shopping experience, cinema, theatre and concert tickets and travel . Cinema Concerts Theatre Restaurants 2012 2013 2014 2015 2016 2017 2018 2019 Retail NPL (%) Household / GDP Source: Data from cbr.ru and gks.ru 8 Shopping Travel Journal Stories 9 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 STRATEGY SELL OR CROSS-SELL ANY FINANCIAL, INSURANCE AND QUASI-FINANCIAL PRODUCTS BY DEVELOPING AND CROSS- SELLING NEW PRODUCTS TO EXISTING CUSTOMERS, TINKOFF EXPECTS TO DIVERSIFY ITS REVENUE STREAMS, LOWER CUSTOMER ACQUISITION COSTS AND MAXIMIZE LIFETIME VALUE OF OUR CUSTOMERS. 01. Sell or cross-sell financial, insurance and quasi-financial products By developing and cross-selling new products to existing custom- ers, Tinkoff expects to diversify its revenue streams, increase its revenue per customer and increase its customer retention rates . Tinkoff Insurance Tinkoff Insurance has developed a proprietary and advanced IT platform and leveraged the vast expertise of Tinkoff Bank to build a customised choice of insurance products, as well as a conven- ient claims settlement and sales process, which can be accessed online from anywhere in Russia . The new online insurance prod- ucts are delivered to the Group’s traditionally high customer service standards . Tinkoff Insurance is currently offering personal accident in- surance, property, travel and car insurance - KASKO and OSAGO . Tinkoff Insurance is rated as “ruBBB-” (a high rate of reliabili- ty) by Expert-RA rating agency . 02. Maintain leadership in customer service High quality customer service has been a key driver of Tinkoff Bank’s rapid growth . Tinkoff invests to maintain and improve key components, such as our simple application processes, convenient and 24/7 access to accounts, the reach of our “smart courier” service, free loan repayments and straight- forward complaints resolution process . Through the launch of a new financial super- market portal Tinkoff Bank is now able to serve not only its existing customers but also non-clients when they are allowed to make transactions without full identification within the legislatively approved limit of 15,000 Roubles . This is a strategic step for Tink- off Bank to increase its exposure throughout the financial market . 03. High liquidity and well-balanced funding base The Group has established a robust liquidity risk management framework that ensures it maintains sufficient liquidity, including a significant cush- ion of liquid assets . Tinkoff Group’s funding strategy provides effective diversification in the sources and tenor of funding . The Group aims to maintain an on-going presence in a broad range of capital market segments and strong relationships with market participants to promote effective diversification of funding sources . 04. Support business expansion using advanced IT systems Tinkoff Bank operates a low-cost, branchless model and seeks to outsource wherever feasible while retaining core functions in-house . This complementary outsourcing strat- egy allows us to retain focus on and develop core competencies to economise on capital expenditures, to manage workflow and to maintain a flexible cost base with low fixed expenses . The Group’s in-house IT team develops a significant part of the software used by Tinkoff, including software used in its online customer acquisition and service platform . This enables Tinkoff to regularly and quickly roll-out new products and services to customers or new versions with enhancements . Tinkoff Bank continues to expand its technological advantages over traditional Russian banks . In 2016 Tinkoff Bank announced its IT expertise expansion through a number of IT development centers in big cities across Russia . By the end of 2018 the number of IT hubs grew to 11 including the virtual development center opened in November . In 2018 Tinkoff Bank: 1) launched nationwide biometric data collection and became an official vendor for the Unified Biometrics System supplying voice recognition technology; 2) joined forces with Russia’s leading IT companies to set up the Big Data Association to set the stage for promoting big data technology and products in Russia, and 3) launched a joint project with NSPK (National Payment Card System) that enables Tinkoff customers to view card receipts details in their user accounts . 07. Further improve cost- efficiency of Tinkoff’s operations The Group intends to further increase the cost-efficiency of its operations by placing an even greater emphasis on its Internet banking, mobile banking and Home Call Centre op- erations and constantly seeking new ways to achieve further reductions in operating and customer acquisition costs . 08. Develop The High-Growth Concept Of The Financial Supermarket, A Platform Offering A Choice Of Consumer Lending, Insurance And Transactional And Payment Services Of Tinkoff As Well As Lifestyle, Entertainment And Partner Products Retail lending remains Tinkoff’s core business . In 2019 we significantly broadened the range of our credit products, with credit cards accounting for 60% of the loan portfolio and secured lending reaching a record high 15% . The contribu- tion from non-credit related business lines further improved in 2018 . Tinkoff Investments, the final business line, was successfully launched in April . Since our non-credit business lines are up and running our focus now is on scaling, monetization and cross-sell potential within our ecosystem . In 2019 we signif- icantly improved our lifestyle and entertainment offering to the customers - culminating in the launch of our Super App - the aggregator of all Tinkoff Group products and a platform that enables customers to satisfy all their credit, transac- tional, and lifestyle needs . The Super App enables seamless integration with partners and now allows customers to access Stories (AI*-based rec- ommendations and user tips based on transactional activity) as well as complete restaurant reservations, purchase cine- ma, theatre and concert tickets and complete e-commerce transactions . The introduction of Oleg, the world's first financial services voice assistant, makes navigation through the Tinkoff platforms seamless and convenient . 05. Develop and deploy transactional and payment products to acquire new customers and increase retention rates for existing customers The technology and experience acquired by Tinkoff in building its high-tech online customer acquisition and ser- vice platform has helped it to expand its transactional and payment products such as current accounts, SME solutions, online acquiring, and mobile mono-applications . We intend to support the growth of these products that constitute an important channel for acquiring new customers and for cross-selling other products, particularly credit cards . These transactional and payment products are also being offered to existing customers of Tinkoff, helping to boost retention rates . Tinkoff E-commerce products Being a pure online player since its very first day, Tinkoff Bank specifically focuses on the e-commerce market . Our existing electronic online and mobile platforms together with a rapidly developing e-com sector give us significant advantages on the market . Besides our core mobile banking application Tinkoff Bank offers a wide range of mobile mono applications (traffic fines payments, card-to-card transfers, MoneyTalk, GoAbroad, Tinkoff SME, Tinkoff Investments, Tinkoff Junior) (and there are plans for more to follow) . A wide range of insurance products, including car insurance, is also available online for customers . In 2018 after a series of product tests and market analysis, we launched a full cycle POS loans and car loans programmes available for our cus- tomers purely online . Sophisticated interfaces and advanced risk scoring allows us to not only efficiently scale these new business lines but also reach out to new customers from different social-demographic groups . 06. Effectively manage credit risk using sophisticated data analysis and modelling As a data-driven organisation, the Group uses a wide range of databases in its loan approval processes and portfolio management and is constantly in search of new sources of relevant data . We take loan approval decisions based on a range of available information, including credit bureau data and scores, proprietary scoring models, a proprietary appli- cation verification process and sophisticated NPV models . The Group will continue to develop credit risk management capabilities and to use increasingly more sophisticated data analysis and modelling to achieve this goal . Credit risk man- agement remains one of the core strengths of Tinkoff and will remain critical to sustaining its competitive advantage . 10 11 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019WHAT MAKES US DIFFERENT TINKOFF IS A CLOUD ECOSYSTEM PROVIDING A FULL SCOPE OF HIGH UTILITY, DAY-TO-DAY FINANCIAL, INSURANCE, LIFESTYLE, AND ENTERTAINMENT SERVICES HIGH-TECH VIRTUAL PLATFORM SINGLE POINT OF DESTINATION FOR DAILY BANKING Tinkoff has built an advanced high-tech retail financial services platform that is highly suited for the Russian market and oper- ating environment, particularly in underserved parts of the country . This platform is entirely branchless, with a low fixed cost base and high degree of operating flexibility . This high-tech platform includes the mobile app, internet platform, a real-time voice authentication system which creates voice prints during the traditional Q&A verification process for each new caller and highly efficient chat-bots and call-bots . We successfully implemented robotisation through the use of Machine Learning, Artificial Intelligence and Computer Vision of a number of processes on an operational level that helps to significantly improve operating efficiency and cost control . Tinkoff is the second largest credit card and short term retail lender in Russia, offering a variety of retail unsecured loans as well as secured home equity and car loans . In addition to our market-leading credit offering, Tinkoff successfully manages online retail deposits programme, retail and car and other insurance, financial products in the fast emerging mobile payments and retail brokerage . Leveraging its innovative approach, existing infrastructure and customer base, Tinkoff has been expand- ing to bring additional partners’ products and services through its full-cycle brokerage platform and further expanding our lifestyle and entertainment offering with travel, ticketing and shopping experience . 23mn call and chat enquiries solved by bots or cloud service agents 3.7mn applications per month on average during 2019 >15.2mn Credit cards issued 13.3% Credit card market share* * As of 31 December 2019 based on CBRF data. over 549RUBbn of customer credit card transactions in 2019 12 13 TCS GROUP HOLDING PLCANNUAL REPORT 2019STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALS WHAT MAKES US DIFFERENT TCS GROUP IS TRANSFORMING THE RUSSIAN FINANCIAL SERVICES MARKET AND DRIVING A DIFFERENTIATED CUSTOMER PROPOSITION. POWERFUL DISTRIBUTION Tinkoff offers remote access customer service through its award-winning Internet banking as well as through mobile banking and high-volume call centres . Our use of direct marketing channels has transformed the way customers are acquired in Russia . Distribution channels, which include online (the Internet, mobile services and telesales), direct mail and direct sales agents, allow Tinkoff to attract new customers anywhere in the country . Supporting the branchless platform is a “smart courier” net- work covering around 2,100 cities and towns in Russia which allows next day delivery . In addition, Tinkoff ’s online origination process makes extensive use of online data and behavioural profiles, and gives it clear advantages over competitors in terms of underwriting . 51.2% Net loan portfolio CAGR 2008-2019 91x Equity grew by 91x in 10 years (from 2009 to 2019) 55.9% ROAE CREATING VALUE IN CHALLENGING MARKETS Our entrepreneurial approach to products, premium-quality customer service and effective credit risk management, based on sophisticated data analysis and modelling, enable us to achieve a combination of sustainable growth and good returns even in a market downturn . The strong trend to adoption of online and mobile consumer technology in Russia, together with the low penetration and growth potential in the country’s retail financial services, represent a tremendous opportunity for Tinkoff to continue its success . №1 Best mobile banking app in Central and Eastern Europe* * by Global Finance 30% of all customer requests across the products processed by chat-bots in 2019 14 15 TCS GROUP HOLDING PLCANNUAL REPORT 2019STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALS CEO STRATEGIC REVIEW Dear Investors It is always a pleasure to announce excellent results, and we did so again in mid March this year for FY2019 . 2019 was another record-breaking year for Tinkoff, with exceptional business devel- opment and financial achievements . Our Ecosystem strategy is bearing tangible fruits, with our products and services more joined-up than ever, and our customers more engaged with us than ever before . We have come such a long way in the last thirteen years; we have evolved into a fully-fledged and rapidly growing lifestyle and financial services Ecosystem – with a suite of transaction- al, lending and lifestyle offerings that are loved by our customers right across Russia . The first part of the current year also reminds us, not that we needed reminding, that unexpected challenges are a part of operating in the Russian markets, though many of the challenges have their origins outside Russia . I will say something more about these later in this strategic review but these should not divert focus from 2019, from the Tinkoff success story of 2019 . I am con- fident in any case that the Group, with its unique business model, the Tinkoff brand, its energy and dynamism, a great strategy, will be able to navigate not just these challenges successfully but also others which will likely confront us in 2020 and beyond . FY2019 was another year of re- cord-high profits . I would like to review 2019 by looking at several themes of the 2019 results, before briefly looking ahead, sharing some of our plans: – – – – – Tinkoff’s significant growth in 2019; high growth did not come at the cost of profitability; asset quality maintained; some highlights of 2019; some observations on what to look forward to, our plans . 2019 was a year of significant growth for Tinkoff We added a total of close to three million customers, more than we have ever added in a single year, to reach and pass the milestone figure of 10 million customers . These customers are increasingly using more of the Tinkoff suite of products, with almost 25% of them using two or more products . Not only are we growing customer numbers, but we are also engaging more with each one of them, thanks to our continued efforts on customer experience, user interface, cross-sell, data management and loyalty initiatives . Our DAU, or daily active users, have reached 1 .8 million up from 1 .1 million a year ago, and our MAU, or monthly active users, have reached 5 .6 million from 3 .7 million a year ago . We see further engagement gains ahead as we leverage our Super App – the first of its kind in Russia and Europe . This Super App contains all our digital ser- vices under one umbrella and allows our customers to satisfy their lifestyle and financial needs at the touch of a screen, by seamlessly accessing Tinkoff as well as partner products . This is a highly technological platform that enables us to have very quick time to market and to provide an extremely engaging customer experience in a capital light and flexible manner . Our lifestyle services have raced ahead . We have over half a million monthly ac- tive users for these services . Every month, our customers are buying on average 350K cinema tickets, 25K concert tickets, 20K theater tickets, making 10K restaurant bookings, 50K flight reservations and 50K hotel reservations . We have a great pipeline of additional entertainment and ticketing options that should continue to drive customer engage- ment on this platform . Growth did not come at the expense of the bottom line and increased profitability Despite the investments required for our fast-paced growth, our 2019 net income of RUB36 .1 bn represents a rise of 33% year on year, giving us an industry-leading return on equity of 55 .9% . You may recall that in 2016 we disclosed to the market our ambition that our net income would grow 20% to 40% per annum until the end of 2019 . I am proud to say that as of the end of 2019 we delivered 49% annual growth over the last three years – an outstanding achievement . Our net loan book grew 66% year-on- year in 2019, reaching RUB329bn and this was powered by both our more mature credit card product, as well as our newest credit products – personal loans and POS loans on the unsecured side, and home equity and car loans on the secured side . The secured part of the portfolio grew from RUB5bn to RUB48bn, now accounting for 15% of total loans . These secured products will we predict continue to be major drivers of growth in future years . They have great risk adjusted margins, are geared to higher quality mass affluent custom- ers, and are relatively capital light . ROAE IS 55.9% AND TOTAL EQUITY CLIMBED TO RUB 96.1BN 55.9% 17 2019 WAS ANOTHER RECORD-BREAKING YEAR FOR TINKOFF, WITH EXCEPTIONAL BUSINESS DEVELOPMENT AND FINANCIAL ACHIEVEMENTS. Oliver Hughes Chief Executive Officer 16 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019CONTINUED CEO STRATEGIC REVIEW To capture these credit growth opportunities, in 2019 we decided to tap the markets for US$300m of fresh equity and RUB20 bn of debt financing alongside suspending our quarterly dividend for 2 quarters . This equity fund raising, the first by a Russian group for many years, was heavily oversubscribed and delivered with a record low discount to MV . We thank all inves- tors for their support and continued confidence in our business . brand proposition led to a 54% year-on-year increase in retail current accounts, which contributed to our funding costs declin- ing 50 basis points to 5 .7% . A word on asset quality Our 2019 profitability was powered not only by the fast-paced growth of the credit portfolio, but also by the ongoing scaling up of our non-credit lines . I will give you a brief update of the main ones here: 2019 was the first year since the 2014-15 crisis where Tinkoff experienced a cost of risk increase year-on-year, from 6% to 8 .5% . Despite some regulatory pressure on small business, our small and medium sized (SME) business line closed the year with 535K customers and a record operating income of RUB4 .8 bn . Our product suite is increasingly geared to larger and more profitable accounts, which should help to deliver high quality growth of the SME business line into the future . Tinkoff Insurance more than doubled its revenue and was one of the fastest growing business lines in the Ecosystem, albeit from a low base . This remains a tricky market but one that is we feel prime to be disrupted . Tinkoff Investments went from strength to strength, breaking even in July 2019 and finishing the year with 1 .1 million indi- vidual customers . We were the #1 retail broker on the Moscow Stock exchange both in terms of account openings and active customers . This is a highly engaging platform, with different tariffs for different kinds of customers, with a Social Network called ‘Pulse’ with over 100K users where investment ideas and discussion forums are held . There is a wide selection of financial assets on offer, some of which Tinkoff now provides ourselves through our in-house asset manager Tinkoff Capital . This is a business line we are particularly excited about as households should continue to diversify their savings away from cash and deposits . Our online merchant acquiring business grew revenues by 57% from RUB4 .2 bn to RUB6 .6 bn, as we consolidated our position as the third largest online acquirer in Russia . This business line is profitable, and we know how to grow it further . Tinkoff Black, our current account business, has gone viral as we added 2 .6 million customers . This product remains the key feeder to our Ecosystem: in fact, more than 40% of our Tinkoff Black customers use two or more Tinkoff products – and we believe this is just the start . Overall, despite the rapid growth, we managed to keep our operating expenses and funding costs in check . As more of our newer businesses hit break-even, our cost to income ratio declined by nearly 5 percentage points in 2019, from 41 .9% to 37 .1% . On the funding cost side, our attractive product and There were several factors at play . First, the impact of frontload- ing of provisioning due to the IFRS9 accounting standard, which is especially meaningful on a fast growing portfolio . Second, there was some re-leveraging of the Russian consumer in some pockets of the population . This led to a softening of roll rates – meaning that when customers went into delinquency, they became slightly more difficult to collect and return to current status . We identified this trend early on, sooner we feel than the competition, and tightened our approval rates . The results of these initiatives were seen in the fourth quarter of 2019, with cost of risk declining to 8 .1% . Fee and commission income (RUBbn) +31.4% 36.0 3.5 6.6 8.2 9.6 27.4 1.6 4.2 6.4 7.6 +24.6% 9.4 1.1 1.5 2.3 8.6 0.7 1.6 1.9 8.3 0.6 1.4 2.1 7.8 0.4 1.5 1.7 10.3 1.3 2.0 2.3 2.4 2.0 2.2 2.5 2.8 7.6 8.2 1.9 2.1 2.2 2.0 1.9 2018 2019 4Q’18 1Q’19 2Q’19 3Q’19 4Q’19 Other SME Merchant acquiring Credit-related Debit cards Our business has never been more sustainable and we are in an excellent position to grow it further Our business has never been more sus- tainable . Here I don’t mean statistics like responsible lending, CO2 emissions and the profile of our workforce important though they are . I mean fundamental business sustainability . Our well targeted spending on research and development, our returns on capital expenditure, renewing and expanding our tangible and intangible facilities, our recruitment and promotions of top talent to the key Management team, building out our Ecosystem . Our credit portfolio has never been more diversified . Our non-credit businesses are gaining momentum and increas- ingly contribute to our bottom line . Our customer base is increasingly composed of highly transactional, highly engaged, young, urban customers . Our Super App is best in class as is our customer service capability . Our technology and advancements in artificial intelligence and machine learning power everything we do at Tinkoff . We know how to acquire customers with positive unit economics and have very clear monetization strate- gies . At the same time, we are extremely alert to our responsibilities as a lender . In 2019 a number of the policies and practices we already had to prevent our customers over-extending themselves were refined and expanded . So while 2019 was an exceptional year, everyone at Tinkoff is extremely excited and motivated for what is ahead as we work to double our active customer base to twenty million in the medium term . My personal choice of business highlights of 2019 As ever, a year has raced by but a few key moments stand out and I would like to bring a few to your attention that show the perhaps surprisingly wide range of cutting edge activities across the Group; – – – – In September, Tinkoff launched Pulse, a free social network for re- tail investors which has been a runaway success; In September, Tink- off reached a new milestone, is- suing our 10 millionth Mastercard card; In October, Tinkoff held a hack- athon in partnership with McK- insey with a prize pool of RUB1 mn; In October, Tinkoff GDRs were admitted to trading on the Moscow Exchange, making the shares more accessible to Russian investors and supporting liquidity and market capitalization growth . I am sure I have missed many that deserve a mention: Ilya Pisemsky also lists his choices elsewhere in this annual report, in his Financial Review . – – In February, Tinkoff Bank was in the first wave of Russian banks to launch the disruptive Faster Payments System for its customers . The CBRF introduced the system to allow nationwide in- stant P2P payments using mobile phone numbers; In July, Tinkoff Group raised $300 mn gross in additional cap- ital through a successful SPO that was highly oversubscribed and saw significant interest from inves- tors across a variety of regions, including strong demand from the US; – Also in July, Tinkoff launched sales of proprietary Tinkoff Voice- Kit text-to-speech and speech- to-text technologies to corporate customers; – In September, Tinkoff signed an exclusive sponsorship contract with Russian tennis ace Daniil Med- vedev; and more recently signed a title partnership agreement with the Russian Football Premier League covering the 2019/2020 and two following seasons; Gross loans 279.7 38.6 234.7 36.2 198.5 241.1 63.6% 333.0 42.8 369.0 49.1 383.9 54.7 LLP 290.3 319.9 329.2 Net loans 4Q’18 1Q’19 2Q’19 3Q’19 4Q’19 18 19 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019CONTINUED CEO STRATEGIC REVIEW OUR RECENT AWARDS To close, I would like to thank the very many people who have made contribu- tions to the success that was 2019-our customers, our founder Oleg Tinkov, the core Management team, employees, in- vestors, business counterparties and our wide range of stakeholders, but above all others our growing pool of customers . THANK YOU! Oliver Hughes Chief Executive Officer We know though how to handle ourselves in all situations as we have demonstrated time and time again for over a decade and we factor crises into our planning as a matter of course . But we are not com- placent and we never let our guard down . A long term ongoing project to which we have devoted much time, thought, expertise and resource is the Group’s corporate governance and over recent years we have tried to further enhance our governance so that it is commen- surate with the ever-changing size and scope of the Group . We have always striven to maintain the highest standards of corporate governance at Tinkoff, to go well beyond the legal minimum . In the coming months we will reach a critical stage in our evolving roadmap of chang- es to enhance governance at the holding company level and in a change perhaps with past practice share it more widely in advance . As well as legal input, we have and will continue to seek investor input into this process in order to incorporate as much stakeholder feedback as pos- sible . We will look for workable, robust solutions to the more complex issues to try to balance the interests of all parties, as well as safeguarding the viability of the business . Looking ahead More recently, we announced a capped, tranched EUR 25m investment into a Eu- ropean fintech start up venture that aims to offer non-credit products to custom- ers in Europe . It is too early to discuss the details of this project, but watch this space as our colleagues put our exper- tise in building and growing a fintech business to the test outside the CIS . As we move into 2020, we believe that we can continue to disburse high quality loans with attractive risk adjusted margins and returns and to grow our non-credit business-lines further . You will find a more detailed analysis of our 2019 financial results in the Financial Review form our CFO, Ilya Pisemsky . I recom- mend you read it . I would like to wrap up with a word on the current situation and some thoughts on what is ahead more generally . I referred earlier to the challenges we face . Tinkoff has been in existence for 13 years and during that time we have been tested by a number of different stress sit- uations . These include the 2008-2009 global financial crisis, the 2014-2015 Russian crisis including a sharp RUB de- valuation and a run on the banks across the whole system, the collapse of many Russian private banks, Tinkoff GDR, RUB and commodities price volatilities, very significant new regulations on retail lending, the global spread of coronavirus and no doubt there will be more . Our crisis response teams have been acti- vated more frequently than most of our peers . Our crisis response teams, which include many of the sharpest and most imaginative minds in Tinkoff, of course prepare for a wide variety of events and combinations of events . • Best Information Security and Fraud Management in Central and • Global Service Quality Performance Awards Eastern Europe • Best Online Portal Services in Central and Eastern Europe • Best Online Cash Management in Central and Eastern Europe • Best Integrated Consumer Bank Site in Central and Eastern Europe 2018, Highest Authorisation Approval Rate – Card Not Present (CNP) • Global Service Quality Performance Awards 2018, Highest Authorisation Approval Rate – Cross-Border Consumer Point of Sale (POS) • Best Online Deposit, Credit and Investment Product Offerings in • Global Service Quality Performance Awards Central and Eastern Europe • Best Corporate Digital Bank in Russia • Best Consumer Digital Bank in Russia • Best Consumer Digital Bank in Central and Eastern Europe • World’s Best Corporate Digital Bank in Information Security and Fraud Management 2018, Emerging Payment Adoption – Contactless • 1st place, Daily Banking category, Mobile Bank Rank 2019 • 1st place, Internet Banking Rank 2019 (Russia's best internet banks for individuals) • Best Investment Company (for the best performance in the investment market in 2019) • Best Bank, People’s Rating of Banks • Best Mobile Operator, People’s Rating of Mobile Operators • Quality Recognition Award (for the high quality of customer foreign • Best Bank for Sole Proprietors currency payments in 2019) • Best Digital Premium Banking, Premium Banking Russia 2019 • Gold, Banking/Finance/Insurance (for Investing is Simple, an advertising campaign for Tinkoff Investments) 20 21 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019FINANCIAL REVIEW Dear Investors Last year I ended my Financial Review by saying 2018 had been an excellent year, a year in which we could see tangible and very positive results flowing through from the Tinkoff Ecosystem . 2018 ended on a high note giving us forward momentum going into 2019 –a year which we at Tinkoff believed had the potential to be even better than 2019 . And so it has proved, that momentum continued all year-Tinkoff in March 2020 posted record high profits for Q4 and full year 2019 . These results secure Tinkoff’s place as the second largest player in the Russian credit card market, with a market share of 13 .3% at 31 December 2019, though since it has increased further . Following my previous course, I would like to bring to your attention some particular highlights of 2019 before turning to the financial results . Al- though many of these have a financial flavor, they also show up some of the ground-breaking technological innovations that Tinkoff is involved, as well as initiatives in educational outreach to retail investors . These we expect will turn out to be the engines of future profitability . My highlights must include: In February 2019 Moody’s upgraded our rating to Ba3 with a stable outlook; and in April the Russian National Analytical Credit Agen- cy-ACRA-reaffirmed Tinkoff Bank’s rating at A(RU) with a stable outlook; In April we launched a 3-year RUB10bn local bond with a 9 .25% coupon; Also in April we launched a co-branded card with Yandex, offer- ing up to 10% cashback for one of 15 services available through Yandex .Plus; at the same time we announced we had built the supercomputer, the Kolmogorov cluster, the most powerful supercomputer among financial institutions, reducing the time required for machine learn- ing and AI-related tasks; In June we launched Tinkoff Capital, the Group’s in-house asset management company, to offer a range of proprietary ETFs; • • • • • • • • I would now like to describe some of the main trends and patterns that we observed in our business throughout 2019 . Assets growth RUBmn +54.3% 14.1% 579.5 57.8 135.2 507.6 42.4 97.0 452.1 23.8 94.2 290.3 319.9 329.2 408.9 31.2 95.2 375.5 33.8 101.3 198.5 241.1 41.9 4Q’18 41.4 1Q’19 43.8 2Q’19 48.4 3Q’19 57.3 4Q’19 In July we closed a successful SPO on the LSE, raising USD300mln in gross proceeds at a narrow discount; Cash and cash equivalents In October Fitch upgraded Tinkoff Bank’s credit rating to BB with a stable outlook; In October Tinkoff GDRs were admitted to trading on the Moscow Exchange; Investment securities and REPO Net loans Other OUR MOMENTUM FROM 2018 CONTINUED ALL YEAR-TINKOFF IN MARCH 2020 POSTED RECORD HIGH PROFITS FOR Q4 2019 AND FULL YEAR 2019 Ilya Pisemsky Chief Financial Officer 22 and • In November/December Tinkoff Journal launched a free course for novice investors, following up its earlier YouTube show ‘Money Doesn’t Sleep’ . These developments, aspects of our superior and innovative offer- ing, are just some of the many which Management believe underpin Tinkoff’s place as Russia’s leading fintech brand . They are the result of many good decisions over many years and the stepping stone to future progress . 23 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019solid growth in other components of the portfolio . That said, credit cards remain a key core product for us and we still see huge potential in this market . The cash loan portfolio did not increase in the second half of the year despite strong loan disbursement . The reason for this is the high early repayment rate for cash loans at the level of approximately 10% per month . Despite this slowdown, this sub portfolio still grew by 65% year-on- year . Looking forward into 2020, this part of the lending business should be an essential middle point between credit cards and home equity loans, allowing us to capture all the upsell and downsell credit opportunities in terms of size, duration and yield . Home equity lending was a story of success in 2019, growing profitably eleven-fold from a mere test into a meaningful business line with over RUB 33bn loans dis- bursed during the year and RUB 9bn loans repaid . State of the art onboarding and collateral registration process- es allowed good conversion rates and high NPS scores from our applicants, which in turn led to relatively cheap acquisition cost and positive selection in terms of risk . Two loans have gone through the full repossession cycle already, with apartments sold on the auctions by bailiffs in early 2020 . In both cases, we lost no money despite the loans going into default – testament to our strict under- writing standards and low LTV . CONTINUED FINANCIAL REVIEW The Group’s balance sheet Traditionally I will start with the Balance Sheet compo- sition . Total Assets of the Group grew by 54 .3% year- on-year . The substantial growth in cash balances and in the investment portfolio during the year was a result of strong inflows from SME and retail current accounts . This trend was especially pronounced during the fourth quarter, pushing the balance sheet proportions towards a strong balance of 33% in cash and securities at the year-end with net loans at 57% of total assets . The structure of our securities portfolio changed throughout the year towards more state and quasi-state bonds, which now represent more than 80% of the portfolio . Throughout the year we built a significant positive revaluation on this portfolio - part of it was realized during 2019 and we plan part of it will be realized in 2020, positively contributing to our net income in 2020 . Our loan portfolio showed an impressive 63 .6% growth for the year on a gross basis and 65 .8% growth for the year on a net basis . This growth was driven by several components of the credit book, including credit cards, cash loans, POS loans and collateralized loans . SME lending remains in test mode, but even there the results are encouraging . The fourth quarter loan book growth was a moderate 4 .1% as we rebalanced our channel mix and managed cost of risk . The credit card portfolio grew 38% year-on-year thanks to strong customer acquisition efforts: we added 2 .4m new activated credit cards in 2019 as a whole . The main channels for distribution during the year were internet and mobile, cross-sell and telesales . Despite showing the strongest year-on-year growth in credit cards in our history, the share of credit cards in the loan portfolio declined to 61% of the net credit book, as a result of the BY THE END OF 2019 TINKOFF BANK HAD ISSUED OVER 15.2MN CREDIT CARDS 15,2mn Cost of Borrowing 6.2% 6.2% 5.5% 5.8% 5.6% 6.3% 5.7% 4Q’18 1Q’19 2Q’19 3Q’19 4Q’19 2018 2019 Car lending is also developing strong- ly and already became break-even in the second half of the year . We target two key sales channels here – offline through dealerships in the regions where we try to bundle our loan product with car insurance and online through car sale aggregators . Both approaches seem to be working well, so we will continue our efforts there in 2020 . The POS business surprised us greatly in 2019 . Point of sale loans is an important channel for cross- sell and we were ready to tolerate it being a mildly loss-making on a standalone basis . However, constant optimization of our product offering, conversions and mix of partners led this business to become profitable in 2019, with the portfolio growing 68% year-on-year . We expect it to remain profitable on a standalone basis in 2020 . Cost of risk improved in the 4th quar- ter after the mild deterioration seen earlier in the year . This was due to certain adjustments to our approv- al and channel mix in the summer, and a certain degree of seasonality towards the end of the year . The NPL ratio went up to 9 .1% which is still lower than a year ago while loans 90 to 180 days overdue increased to 3 .3% of the gross portfolio . Our funding base is growing strongly mirroring asset growth . The total funding balance of the Group grew by 45 .5% year-on-year . Growth was most visible in retail current ac- counts, term deposits and funds from SME customers which grew by 54%, 37% and 49% respectively during the year . Most of the current account money funds our treasury portfolio or resides in cash, while term deposits together with bonds and most of the equity fund the loan portfolio . There is an overlap in this fund distribution as we use current account money to fund shorter duration loans such as POS loans and credit cards in grace period . At year-end this overlap constituted 20% of the gross loan portfolio, the same as a year ago . Our liquidity position therefore remains exceptionally strong . I would like to reiterate that the Group holds a neutral currency position with all long term liabilities covered to maturity with FX swaps . Shareholders’ equity increased by 15 .2% in the fourth quarter to RUB96 .1 bn thanks to strong quar- terly profits and the suspension of dividends for two quarters . Our Basel ratios are in the 19% area . Statutory ratios have increased after the SPO and THE temporary dividend suspension - the N1 .0 and N1 .1 ratios went up to 12 .1% and 9 .5% respec- tively . Going forward, we will target N1 .0 above 12 .5% and N1 .1 above 9% . These are targets we believe we can achieve while resuming our quar- terly dividend payments this year . Because of the low share of FX-de- nominated assets and our USD-de- nominated AT1 perpetual instru- ments, the sensitivity of our capital ratios to changes in RUB exchange rate in 2019 was negligible . The Risk Weighted Assets of the Group are distributed amongst credit, operational and market risks . During the year our RWAs grew by 45%, mostly because of the credit component, which has almost dou- bled . We expect the retail book RWA density to grow in 2020 from 168% at the end of 2019 . This is due to the gradual implementation of higher risk weights announced by the CBR, which will be in part be offset by an increased proportion of secured loans with 100% risk weight . 24 25 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019Now some comments on our fee and commission business . In 2019 fee and commission income increased by 31%, with impressive growth across all business lines and espe- cially strong dynamics in the growth of insurance premia earned . With over 7 million customers and with almost RUB212bn of balances, our current account business contributed RUB8 .2bn in fee and commission income in 2019, net of the cashback that we return to our customers . We contin- ue to develop this product as the cornerstone of subse- quent cross-sell opportunities . Our present intention is to keep our bottom-line result for this business at break- even . We see more value in growing the customer base and in the potential synergetic effect with other business lines rather than as a source of pure net income . Our SME business is developing at a good pace, bringing us new customers, which in turn increases the transaction volumes . At the end of 2019 we had 535K customers with over RUB60bn in balances on SME current accounts . We earned RUB9 .6bn in fees during the year in addition to treasury income . The SME lending business is still in test mode with a total loan balance of about RUB1 bn . CONTINUED FINANCIAL REVIEW Profit and loss statement Now I will turn to the Income Statement and our revenue dynamics . Compared to 2018 our revenue grew by 45% to RUB165 bln, with the share of revenue from credit busi- ness lines declining from 68% in 2018 to 67% in 2019 despite the strong growth of the credit business . This trajectory we believe should continue into 2020 . In 2019 interest income grew by 43% . Our headline gross interest yield on the credit portfolio decreased from 36 .0% to 32 .1%, mostly due to the more rapidly growing part of non credit card loan portfolio . It is likely that dur- ing 2020 gross yield will continue to gradually move down as a result of the changing portfolio mix . Interest expenses grew by 38% year-on-year compared to 45+% growth of the average funding base . Our blended cost of borrowing declined from 6 .3% to 5 .7% thanks to large inflows of cheaper retail and SME funding sources . Net interest income increased by 45% in 2019, while net interest margin went down to 21 .6% and our risk-adjusted net interest margin decreased to 14 .9% . This was due to the reduction in the gross yield explained earlier and growing cost of risk, which went up into the 9% area dur- ing the summer and went down into the 8% area during the 4th quarter . Cost of risk for the year increased from 6% to 8 .5%, leading to an 8bn RUB negative pretax effect, amounting to 17 .5% of our pretax profit . Nonetheless, even at this level of cost of risk we continue to see many NPV positive lending opportunities . Net interest income RUBbn +44.6% +46.1% 86.8 21.8 23.3 23.6 60.0 18.1 16.1 2018 2019 4Q’18 1Q’19 2Q’19 3Q’19 4Q’19 TINKOFF BANK ISSUED OVER 7.1MN DEBIT CARDS AT YE2019 DEBIT CARDS >7.1mn So I believe this gives you a fair picture of FY2019, a year which was in many ways a year of continuity . Further build- ing out of the Ecosystem and expanding our non-credit business lines, while achieving a great many important technological milestones; these combined with hard work from the entire Management team and insightful and timely decision-making delivered excellent financial results . FY2019 as the latest in a string of record breaking years may prove a hard year to beat, but we in Tinkoff can assure you every effort will be made to do so . We are confident that we will deliver in 2020 . Our investment business is profitable and is growing remarkably fast . Over a million customers opened accounts on our Tinkoff Investments platform, with quarterly transaction volumes exceeding 500bn Rubles compared to RUB77bn a year ago . The total balances held on accounts has tripled over a year to over RUB53bn . Fee income grew almost 5 times if we compare Q4 2019 with Q4 2018 . While this busi- ness’s contribution to Group results was still margin- al in 2019, we are optimistic about its prospects in 2020 and onwards . We will continue to develop our platform, product proposition and grow our custom- er base into 2020, as always, trying to find a fine line between the profitability and growth . Now some comments regarding operating expenses . In the recent quarters you can see that our costs were relatively flat which had a positive effect on our operating efficien- cy, with the cost to income ratio declining almost 5% for the year from 41 .9% to 37 .1% . Total administrative costs grew 28 .9% year-on-year, which is only 60% of our top line growth and only 53% of asset growth . This is testa- ment to the business’s ability to keep lean and to show economies of scale . Last but by no means least, profits . The Group yet again achieved a quarterly record profit of RUB11bn in Q4 2019 and RUB36 .1bn for the full year 2019 which is 33% higher than for 2018 . Return on equity of 55 .9% remains industry leading despite the significant increase in our equity base . Return on assets remained at an impressive 8% despite an outstanding liquidity buffer of 33% of total assets . Ilya Pisemsky Chief Financial Officer 26 27 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019ASSET, LIABILITY AND RISK MANAGEMENT The purpose of the Group’s asset, liability and risk management (“risk management”) strategy is to evaluate, monitor and man- age the risks arising from the Group’s activities . The main types of risk inherent in the Group’s business are credit risk, market risk, which includes foreign currency exchange risk, interest rate risk and liquidity risk . The Group designs its risk management policy to manage these risks by establishing procedures and setting limits that are monitored by the relevant departments . Risk Management Organisational Structure The Group’s risk management organisation is divided between policy making bodies that are responsible for establishing risk management policies and procedures (including the establishment of limits) and policy implementation bodies whose function is to implement those policies and procedures, including monitoring and controlling risks and limits . Policy Making Bodies The policy making level of the Group’s risk management organisa- tion consists of the Board of Direc- tors, and at the Tinkoff Bank level its Board of Directors, the Management Board, the Finance Committee, the Credit Committee and the Business Development Committee . These bodies perform the following functions: Board of Directors The Board of Directors is responsible for the creation and supervision of the operations of the internal control system of the Group and approves the Group’s credit policy (“Credit Pol- icy”) and approves certain decisions that fall outside the scope of the Credit Committee’s authority . Management Board The Bank’s Management Board, which, in addition to its Chairman, also includes the Group’s Risk Direc- tor, Chief Financial Officer, Chief Ac- countant, Chief Legal Counsel, Chief Operational Officer and Head of Pay- ment Systems, has overall responsi- bility for the Group’s asset, liability and risk management operations, policies and procedures . The Man- agement Board delegates individual risk management functions to each of the various decision making and execution bodies within the Group’s risk management structure . The Chairman of the Management Board appoints members of the Finance Committee and Credit Committee . Finance Committee The purpose of the Finance Commit- tee is to ensure the long-term eco- nomic effectiveness and stability of the Group’s operations . The Finance Committee establishes the Group’s policy with respect to capital ade- quacy and market risks, including market limits, manages the Group’s assets and liabilities, establishes the Group’s medium term and long term liquidity risk management policy and sets interest rate policy and charges with respect to individual loan prod- ucts . The Finance Committee must consist of at least five members (currently there are seven members) and the Chairman of the Manage- ment Board acts as the Chairman of the Finance Committee . The Finance Committee meets on a weekly basis and makes its decisions by simple majority provided that a quorum of at least half of the members of the Finance Committee is present . Credit Committee The Credit Committee supervises and manages the Group’s credit risks . With respect to credit cards, the Credit Committee approves the con- sumer lending policy, the underwrit- ing methodologies and the scoring models used for assessment of the probability of default, the initial cred- it limit assignment and subsequent account management strategies, provisioning rates and decisions to write off non-performing loans . This Committee must consist of at least five members (currently there are six members) and the Chairman of the Management Board acts as the Chairman of the Credit Committee . It meets when necessary, but at least once each month, and makes its de- cision by a simple majority vote of all the members present provided that a quorum of at least half of the mem- bers of the Committee is present . Business Development Committee The Business Development Commit- tee is responsible for the devel- opment, design and marketing of the Group’s financial products and provides recommendations to the Group’s risk management bodies with respect to changes to the Group’s lending policies and proce- dures and the pricing of the Group’s loan products . This Committee con- sists of 12 members appointed by the Management Board . It meets on a weekly basis and makes its deci- sions by a simple majority provided that a quorum consisting of at least half of the appointed members of the Business Development Commit- tee is present . THE GOAL OF THE GROUP’S RISK MANAGEMENT FUNCTION IS TO IDENTIFY POTENTIAL PROBLEMS BEFORE THEY MATERIALIZE AND HAVE A PLAN FOR ADDRESSING THEM IF AND WHEN, AND IN THE FORM, THEY DO. COVERING BOTH INTERNAL AND EXTERNAL RISKS WHICH MIGHT HAVE AN ADVERSE IMPACT ON THE GROUP, THE GROUP’S APPROACH CAN BE STRIPPED DOWN TO FOUR ESSENTIALS: DEFINING A RISK MANAGEMENT STRATEGY, IDENTIFYING AND ANALYZING AND RE- ANALYZING RISKS, PRO-ACTIVELY MANAGING RISKS THROUGH IMPLEMENTING THAT STRATEGY AND DRAWING UP A CONTINGENCY PLAN AND/OR PREVENTATIVE MEASURES. Policy Implementation Bodies Management Reporting Systems The policy implementation level of the Group’s risk man- agement organisation consists of the Finance Department, the Risk Management Department, the Collections Depart- ment and the Internal Control Service . Finance Department The Finance Department is responsible for managing correspondent accounts, daily currency liquidity, money transfer control and daily money transfer modelling to sup- port the required currency liquidity level for correspondent accounts and compliance with the CBR’s liquidity ratios . The Finance Department is also responsible for closing international and local transactions in accordance with the Group’s limits as approved by the Finance Committee and in compliance with the CBR’s regulations, as well as for short term placements, currency hedging and interest rate hedging . Risk Management Department The Risk Management Department is responsible for the development and implementation of the Group’s consumer lending policy after the final approval of such policy by the Credit Committee . The Risk Management Department is also responsible for credit risk assessment of all proposed new products and related marketing communications, for approval of credit card applications and other loan prod- ucts applications and for subsequent account management programmes . Collections Department The Collections Department is responsible for collection of amounts due but unpaid by delinquent Group customers . The Management Board approves the Group’s collections policy, which is then implemented by the Collections Department . Internal Control Service The Internal Control Service assesses the adequacy of internal procedures and professional standards, as well as their compliance with CBR regulations . The Internal Control Service is controlled by, and reports to, the Bank’s Board of Directors . The Group has implemented an online analytical process- ing management reporting system based on a common SAS data warehouse that is updated on a daily basis . The set of daily reports includes (but is not limited to) sales reports, application processing reports, reports on the risk characteristics of the credit card portfolio, vintage reports, transition matrix (roll rates) reports, reports on pre, early and late collections activities, reports on compliance with the CBR’s requirements, capital adequacy and liquidity reports, operational liquidity forecast reports and informa- tion on intraday cash flows . Some reports are submitted for the review of the Board of Directors on a monthly basis . These include selected financial information based on IFRS and adjusted to meet the requirements of internal reporting, analytical reports on credit risk and lending, reports on the status of the Group’s credit card business accompanied by management commentary and analysis and reports on the Group’s per- formance versus budget and operational risk reports . Overview of principal risks The Group is subject to a number of principal risks which might adversely impact its performance . All of the Group’s assets and customers are located in or have businesses related to Russia . Consequently the Group is affected by the state of the Russian economy which is itself to a significant degree dependent on exports of key commodities such as oil, gas, iron ore and other raw materials, on imports of material amounts of consumer and other goods and on access to international sources of financing . During recent years the Russian economy has been significantly and negatively impacted by a combina- tion of macroeconomic and geopolitical factors such as a significant decline in the price of oil, ongoing political tension in the region, economic sanctions imposed against Russian individuals and companies, economic restrictions imposed by Russia on other countries, capital outflows as well as depreciation of the Rouble and a decrease in Russia’s international reserves . In addition emerging mar- kets such as Russia are subject to greater risks than more mature markets, including significant political, economic and legal risks . This over-arching risk environment could impact one or more of the principal risks . 28 29 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019CONTINUED ASSET, LIABILITY AND RISK MANAGEMENT The principal activity of the Group is banking operations and so it is within this area that the Principal Risks occur . Management considers that those principal risks, are: • Credit risk; • Market risk; • Foreign currency exchange risk; • Interest rate risk; • Liquidity risk; and • Operational risk . Credit Risk The Group is exposed to credit risk, which is the risk that a customer will be unable to pay amounts in full when due . Credit risk arises mainly in the context of the Group’s consumer lending activities . The general principles of the Group’s credit policy are outlined in the Credit Policy approved by the Board of Direc- tors . This document also outlines credit risk controls and monitoring procedures and the Group’s credit risk management systems . Credit limits with respect to credit card applications are established by the Credit Committee and by officers of the Risk Management Department . The Group structures the levels of its credit risk exposure by placing limits on the amount of risk accepted in relation to different online (Internet, mobile and telesales) and offline (sales through retailers) customer acquisition channels and sub-channels . Such risks are monitored on an ongoing basis and are subject to quarterly or more frequent review with the approval of the Manage- ment Board . The Group uses automated systems to evaluate an applicant’s creditworthiness (“scoring”) . The system is regularly mod- ified to incorporate past experience and new data acquired on an iterative basis . The Group performs close credit risk monitoring throughout the life of a loan . Loan Approval Criteria and Procedures The Group is primarily focused on reducing incoming credit risk at the acquisition stage . The Group’s Credit Committee has established general principles for lending to individual cus- tomers . According to these principles, the minimum requirements for poten- tial customers are as follows: • Citizenship of the Russian Feder- ation; • Aged from 18 to 70 inclusive; • Possession of a mobile phone; • Permanent current employment; • Monthly income above five thou- sand Roubles; and • Permanent or temporary place of residence . In almost all cases, the decision to issue a credit card or other loan product to a potential customer is made automatically, based on the credit bureaus information, verification of the customer’s identity and credit score of the applicant calculated using one of the acquisition channel-specific scoring models . In very rare cases, decisions to issue credit cards to high income or high net worth customers are taken manually by members of the Credit Committee, but the number of loans granted under such circumstanc- es is immaterial . The decision to issue a credit card or loan to a customer is made after com- pletion of the following steps: Solicitation – The initial step in the un- derwriting process that applies to one- to-one marketing channels (e-mails, phone calls, SMS messages and direct mail) is pre-screening of prospective customers . At this stage, the Group’s loan officers check available informa- tion on prospective customers and remove potential non creditworthy customers, thereby reducing the cost of customer acquisition . Validation – The purpose of this stage is to ensure the validity, completeness and quality of application data . The Group’s system checks the integrity of the data and, if necessary, call centre staff call applicants to ask them to provide addi- tional information or documentation . Verification – At this stage, the Group’s loan officers verify information provided by the applicant in their appli- cation form . This includes confirming the applicant’s identity, for example through the telephone numbers from the credit bureau report; investigation of the applicant’s financial situation during a phone interview; and verifica- tion of employment details (including verification that an applicant’s employ- er is an officially registered legal entity, review of the employer’s website to make sure that this entity exists and continues to operate, confirmation of the applicant’s employment using telephone numbers of the legal entities from their registrars and, wherever possible, verification of the appli- cant’s declared income with his or her employer) . As part of the verification process, the Group’s loan officers also gather as many phone numbers linked to the applicant as possible (land-line and mobile, personal and that of a friend and/or a relative) to facilitate future collection efforts . Credit Bureaus – Subject to the prior consent of the applicants, the Group sends incoming applications to the largest credit bureaus in Russia in- cluding Equifax, Unified Credit Bureau (Sberbank, Experian, Interfax) and National Bureaus of Credit Histories, and requests applicants’ credit histories . Typically, approximately 18 per cent . of applicants have no credit history in the credit bureaus but they are not auto- matically rejected and can be accepted on the basis of information provided in their application forms and other sourc- es of information described below . Scoring Model to Identify Fraud – At this stage, the Group investigates whether the applicant is currently in default according to credit bureaus reports, whether the applicant’s passport is invalid according to the Federal Migration Service records, whether the applicant’s name appears in any of the Group’s proprietary databases or whether any application details (for ex- ample, telephone numbers or addresses) are identified as fraudulent in databases of other banks available through antifraud services provided by credit bureaus – Fraud Prevention Service (Equifax) and National Hunter (UCB) . Scoring Models for the Application – the Group has internally developed a set of acquisition channel-specific statistical models that rank all applicants accord- ing to their probability of default during the next 12 months . These models use, among other things, (i) demographic data from the application form (for example, age, gender, education and marital status), (ii) payment history, when available – both positive and negative – from the three largest credit bureaus in Russia, (iii) chan- nel-specific marketing and behavioural information (for example, device used to fill in the application form, time between application and first call and the amount of time a web visitor spends on a website) . Application of the NPV Model and Final Decision – the Group has developed acquisition channel-specific models that, among other things, estimate a potential customer’s net present value from one used credit card . The key components of every NPV model are the customer’s probability of default, tendency to use a grace period, and other behaviour characteristics which are calculated using internal scoring models . For potential customers incoming from a particular ac- quisition channel, and taking into account such customers’ estimated behaviour characteristics, initial credit limit and tariff plan, the models estimate the Group’s future cash flows from each customer by modelling his or her behaviour in respect of, among others, credit limit utilisation levels, transactional activity, share of cash withdrawals in total card activity and repayment rates . The Group takes a NPV-positive approach to approval of all applications, which means that an appli- cation is approved only when the potential customer’s net present value from the use of his or her credit card is positive . For all NPV calculations a discount rate of 30 per cent . is used . The Group also maintains a flexible initial limit allocation system that allows it to reduce or increase the average initial limits in order to manage anticipated loan losses and liquidity . Credit Line Management Procedures Credit line management procedures for credit card products include the following: Initial Credit Line Calculation Loan Collection The customer’s initial credit limit depends primarily on such customer’s probability of default and his or her income . Lower probability of default and higher income have a positive impact on the initial credit limit . The initial limit cannot exceed three monthly salaries of the customer or RUB 120,000, whichever is lower . Regular Update of Credit Line Once the Group has received at least three minimum payments from a new cus- tomer and each six months thereafter, the Group reviews the customer’s credit limit . As part of the process, the Group updates credit bureaus reports with respect to the customer and re-calculates such customer’s probability of default with the help of internal behavioural scoring model . Based on the updated probability of de- fault, the credit limit may be increased . For premium customers the credit limit may be increased further . The Group employs a multi stage collection process that seeks to achieve greater efficiency in the recovery of overdue credit card loans . Collections on loans that are overdue by 0 to 90 days are performed by the Group’s internal Collections Department . After 90 days of delinquency, when it is clear that the early collection efforts are unlikely to be effec- tive, customer’s debt may be restructured into instalment loans (which is the option preferred by the Group), transferred to collections through courts or sold to its internal collection agency (Feniks) or external collection agencies . The Group’s collections methodology is based on customer behaviour and cor- responding collection scores . Under this approach, at initial stage of collections (pre collections and early collections), delinquent customers are allocated to one of three groups depending on their risk profile (high risk of default, medium risk of default and low risk of default) . This enables the Group to apply a variety of collections tools and collections treat- ments to different groups of delinquent customers . All of the stages described below may be accelerated in cases where the Group has grounds to believe that the delinquent customer will not repay the debt voluntar- ily or that fraud has taken place . In such circumstances, the time periods between each collections stage are shortened or omitted (the respective loans are accel- erated into collections used for non-per- forming loans) in order to increase the chances of recovery . The Group’s management uses monthly second payment default rate (percentage of accounts on which payment has not been received within 30 days of the first due date) as an important measure of as- set quality that provides early indication of how non-performing loans levels and provisions might change in the future . 30 31 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019CONTINUED ASSET, LIABILITY AND RISK MANAGEMENT Pre Collections (Four Days Prior to Due Date). The Group sends to all customers a reminder about forth- coming payments and the amount due two to four days prior to the due date . The customer receives a SMS and/or an e-mail . High-risk customers also receive a call . Pre collections calling has proved to be an important way to combat delinquency . Early Collections (0 – 30 Days). If payment is more than one day overdue, the customer receives reminders via SMS and email, as well as calls from the collections team . The level of contact is determined by behavioural scoring (their probability of default based on the customer’s previous history with the Group and external credit bureaus scores) to ensure efficient use of col- lections resources . “Soft” Collections (30 – 90 Days). Once a credit card loan becomes more than 30 days overdue (after the second payment default), the customer is switched to “soft” collections . On the 31st day of delinquency, the customer is sent a written notification of the missed payment and receives SMS and e-mail reminders at regular intervals, as well as follow up calls by members of the “soft” collections team . The Group’s objective at the “soft” collec- tion stage is to identify and assess the reasons why the customer has missed Fraud Prevention The Group maintains a fraud prevention strategy which is based on the identifica- tion and fraud monitoring . Access to customers’ accounts is secured via smart identification sys- tem, which takes into account various customer profile parameters, including information on a device used and session data, and sets an identification level . Depending on such identification level, the customer needs to acknowledge the entry into the account by way of a login and password, four-digit access code, fingerprint, security question or a payments, to assist the customer in making payments, to collect payments and to identify early customers who should be transferred to collections used for non-performing loans . In rare circumstances, the Group provides temporary relief from credit card re- payments for a period that usually does not exceed three months to borrowers with temporary financial difficulties but with a positive credit history . Monthly minimal payments are reduced to an amount that a borrower is able to repay during the relief period . Non-Performing Loans Management. When loans are overdue by more than 90 days, the Group collection efforts consists of (i) the restructuring of credit card debt to personal instalment loans, which is the preferred option of the Group to handle such delinquency, or, if customers do not agree to such restructuring, then either (ii) collec- tions through courts with the enforce- ment of judgments with the help of the Federal Service of Court Bailiffs of the Russian Federation or (iii) sales of non-performing loans to its internal collection agency (Feniks) or external collection agencies . Conversion of Credit Card Debt to Personal Instalment Loans. Conver- sion of credit card debt to personal instalment loans was first introduced by the Group in 2010 . This programme is based on regular instalments paid by delinquent customers . After consulta- tions with the delinquent customer, the Group fixes the outstanding amount of the debt under the credit card loan and offers the customer an option to repay his or her debt in monthly instalments during a period limited to 36 months . Recoveries through the Courts. The Group applies to courts through mail- ing standardised claims rather than appearing before a court to enforce overdue loans . The Group considers these generally straightforward and quick court proceedings as a preferred alternative to collection agency ser- vices in those locations in which court decisions can be obtained in approx- imately three months or faster . Most courts in Russia are able to resolve court cases initiated by the Group within this time framework . Sales of Non-Performing Loans to Collection Agencies. Typically, loans delinquent for more than 150 days and not converted into instalment loans or being resolved through claims submitted to the courts, and loans with court orders with low collection rate are sold to in-house Feniks collection agency . In rare circumstances limited loan portfolios are sold to external collection agencies . password sent to the customer’s contact number . In securing access to customers’ accounts a two-factor identification is used . Customer support centres use a unified identification manager, which allows to request a customer’s identification data and passwords without providing access to such data to the customer support service . In addition, a real-time voice au- thentication system is used to verify the identity of a caller . The system is based on the NICE Real-Time Voice Authentica- tion System by Nice . The system is syn- chronised with the universal authentica- tion manager processing customer calls to the centre . This technology enables customer voice identification during a regular phone call, reducing verification time from 40 seconds to 7 seconds . This dramatically improved customer experi- ence by saving customer time and helped to reduce traffic costs and enhance secu- rity, given the prevalent risk of personal data in the age of social engineering . Payment operations are generally secured via one-time SMS codes . Any operations with cash and movements on customer accounts are only carried out upon confirmation using a code sent via SMS and push notifications . IMSI system is used to check to authenticate a sim card . Unauthorised operations are prevented by fraud monitoring system, which is based on IBM Safer Payments solu- tion . The system allows to effectively prevent fraud at various stages of a payment process using a cross-channel monitoring . This secures online banking, emission, acquiring, deposit withdrawals, sms-banking, operations on accounts of legal entities . The monitoring system may, inter alia, automatically reject or suspend a pay- ment, block an account or send an alert report of a suspicious operation . Once a suspicious transaction is identified a customer may confirm such operation by phone, sms-bank or mobile application When suspicious transactions are identified, the Bank gives the customer a choice - to confirm transactions by phone or for cases with the presence of a card through the sms-bank or mobile application . In more than 90 per cent . of cases, the customer does not have to contact the bank by phone, which is es- pecially important for customers abroad . Estimation of credit loss allowance for expected credit loss Estimation of credit loss allowance for expected credit loss (ECL) is performed in accordance with IFRS 9 from 1 January 2018. The Group assesses on a forward-look- ing basis the ECL for debt instruments (including loans) measured at amor- tised cost (AC) and Fair value through other comprehensive income (FVOCI) and for the exposure arising from loan commitments and financial guarantee contracts . The Group applies a “three stage” model for impairment in accordance with IFRS 9, based on changes in credit quality since initial recognition: 1) A financial instrument that is not credit-impaired on initial recognition is classified in Stage 1 . Financial assets in Stage 1 have their ECL measured at an amount equal to the portion of lifetime ECL that results from default events possible within the next 12 months or until contractual maturity, if shorter (“12 months ECL”) . 2) If the Group identifies a significant increase in credit risk since initial recogni- tion, the asset is transferred to Stage 2 and its ECL is measured based on ECL on a lifetime basis, that is, up until contractual maturity but considering expect- ed prepayments, if any (“lifetime ECL”) . 3) If the Group determines that a financial asset is credit-impaired, the asset is The measurement of ECL reflects: transferred to Stage 3 and its ECL is measured as a lifetime ECL . As an exception, for certain financial instruments, such as credit cards, that may include both a loan and an undrawn commitment component, the Group measures expected credit losses over the period that the Group is exposed to credit risk, that is, until the expected credit losses would be mitigated by credit risk management actions, even if that period extends beyond the maximum contractual period . peri- od extends beyond the maximum contractual period . 1) an unbiased and probability weight- ed amount that is determined by evaluating a range of possible outcomes; 2) the time value of money; and 3) all reasonable and supportable information that is available without undue cost and effort at the end of each reporting period about past events, current conditions and forecasts of future conditions . 32 33 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019CONTINUED ASSET, LIABILITY AND RISK MANAGEMENT CBR requires banks to classify their loans into the following five risk categories and to create provisions in the corresponding amount at their discretion: Loan classification Status of loan and loss potential Provisioning range (in %) Category I Category II Category III Category IV Category V Standard loans, without credit risk Non-standard loans, moderate credit risk Doubtful loans, considerable credit risk Problem loans, high credit risk Bad loans 0 1-20 21-50 51-100 100 Write Off Policy The Management Board makes decisions on loans to be written off based on information provided by the Risk Management Department . Generally, loans recommended to be written off are those in respect of which further steps to enforce collection are regarded as not economically viable . Loans sold to external collection agencies are also written off from the Group’s balance sheet . Foreign Currency Exchange Risk The Group suffered from the Rouble devaluation in November 2008 to February 2009 and has implemented a “low foreign exchange risk tolerance” policy aiming to minimise exposure to foreign currency exchange risks . The policy imposes neutral hedging that matches assets and liabilities by currency, foreign exchange hedging of funding received in foreign currency and prohibits foreign exchange trading for speculative purposes . Non-monetary assets are not con- sidered to give rise to any material currency risk . Interest Rate Risk The Group’s exposure to interest rate risks arises due to the impact of fluctu- ations 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 also decrease or create losses in the event that unexpected move- ments arise . The Group’s management monitors on a daily basis and sets lim- its on the level of mismatch of interest rate repricing that may be undertaken . The Group has no significant risk associated with variable interest rates on loans and advances provided to customers or loans received . Market Risk The Group’s exposure to market risk arises from open interest rate and foreign currency positions, which are exposed to general and specific market movements . The Group is generally not engaged in trading operations . It has mismatches in its foreign currency positions that arise generally due to relatively short term lending in Roubles and relatively long term borrowings in U .S . dollars . The Group manages the positions through hedging, matching or con- trolled mismatching . The CBR sets limits on the open curren- cy position that may be accepted by the Group on a stand-alone level, which is monitored on a daily basis . These limits prevent the Group from having an open currency position in any currency exceeding five per cent . of the Group’s equity . Liquidity Risk Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities . The Group is exposed to daily calls on its available cash resources from unused limits on issued credit cards, retail deposits from customers, current accounts and due to banks . The Group does not maintain cash resources to meet all of these needs as experience shows that only a certain level of calls will take place and it can be predicted with a high level of cer- tainty . Liquidity risk is managed by the Financial Committee of the Bank . The Group seeks to maintain a stable funding base primarily consisting of amounts due to institutional investors, corporate and retail customer deposits and debt securities . Debt securities in issue consist of Rouble-denominated domestic bonds with maturities of up to five years, in particular RUB 3 billion 11 .7 per cent . domestic bonds due 2021 with 18 months put option and RUB 5 billion 9 .65 per cent . domestic bonds due 2022 with a two year put option . The Group keeps all available cash in diversified portfolios of liquid instruments, such as a correspondent account with the CBR and overnight placements in high rated commercial banks, in order to be able to respond quickly and smoothly to unforeseen liquidity requirements . The Group believes that the available cash at all times is sufficient to cover (i) debt repayments due within a month and accrued interest for one month ahead and (ii) a deposit liquidity cushion cal- culated as at least 15 per cent . of total retail deposits (but in practice usually maintained at a level between 20 and 25 per cent .) . The Group believes that it has a proven ability to control loan portfolio cash flows to maintain levels of liquidity reflecting changing market realities . The Group also believes that its loan portfolio is responsive to change in inputs (such as stopping the issuance of any new credit cards or other loans and any increases in credit card limits) and that the Group can go from being cash-negative to being cash positive in a short period of time (estimated to be two weeks), as it was able to do in No- vember 2008 and in September 2011 . The Group’s liquidity management requires (i) considering the level of liquid assets necessary to settle obli- gations as they fall due; (ii) maintaining access to a range of funding sources; (iii) maintaining funding contingency plans; and (iv) monitoring balance sheet liquidity ratios against applicable regulatory requirements . Tinkoff Bank calculates liquidity ratios on a daily basis in accordance with the requirements of the CBR, based on stand-alone RAS information of Tinkoff Bank, which is substantially different from the Group’s IFRS results . These ratios are: – – – Instant liquidity ratio (N2), which is calculated as the ratio of highly liquid assets to liabilities payable on demand . The minimum statuto- ry ratio permitted by the CBR is 15 per cent . Current liquidity ratio (N3), which is calculated as the ratio of liquid assets to liabilities maturing within 30 calendar days . The minimum statutory ratio permitted by the CBR is 50 per cent . Long term liquidity ratio (N4), which is calculated as the ratio of assets maturing after one year to regulatory capital and liabilities maturing after one year . The max- imum statutory ratio permitted by the CBR is 120 per cent . Credit risk Market risk Operational risk RISK MANAGEMENT Foreign currency exchange risk Liquidity risk Interest rate risk 34 35 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019CONTINUED ASSET, LIABILITY AND RISK MANAGEMENT For purposes of managing the Group’s liquidity risk, the CFO regularly receives extensive information about the liquidity profile of the financial assets and liabilities . Monitoring of the Group’s liquidity position includes, among other things: – Monthly credit card loan portfolio trends monitoring, which covers transaction and repayment levels, delinquency levels, first month utilisation levels and backlog utilisation levels . This information allows the Group management to exercise control over longer-term cash flows and portfolio size and to plan for debt repayments one to two years ahead; Daily monitoring of transactions, repayments and deposits with data for the day updated each evening; Close deposit monitoring through daily reports and periodic deposit portfolio/behavioural analysis; Daily monitoring of credit card, deposits and cash balances with a one-day lag for all balances; Daily monitoring of movements on CBR and Nostro correspondent accounts; and Daily monitoring of payments flows, which consists of tracking incoming and outgoing payments including all future payments for up to three days in advance . – – – – – All daily reports also include week-to- day and month-to-day comparisons . On the basis of all these reports, the CFO then ensures the availability of an adequate portfolio of short term liquid assets, made up of an amount in the correspondent account with the CBR and overnight deposits with banks, to ensure that sufficient liquidity is main- tained within the Group as a whole . The Group’s assets and liabilities management and liquidity policy takes into account certain relatively stable characteristics of the credit card loan portfolio, such as, among others, (i) regular monthly repayments of a pre- dictable % of outstanding receivables, (ii) average utilization of a predicta- ble % of the total portfolio limit, (iii) average utilization of a predictable % of any added amount within three months after regular credit limit upgrades, (iv) positive NPV on a credit card after 12 to 18 months; (v) risk profile of the portfolio, with decreas- ing delinquency rates resulting in increases in both repayments and transactions and (vi) seasonality, with a spike in usage in December of each year and a slowdown in usage in Janu- ary and August . Regular liquidity stress testing under a variety of scenarios covering both normal and more severe market conditions and credit card portfolio behaviour is reviewed by the CFO . All the investment securities available for sale are classified within demand and less than one month as they are easy repoable in the CBR or on the open market securities and can pro- vide immediate liquidity to the Group . All current accounts of individuals are classified within demand and less than one month . The allocation of deposits of individ- uals considers the statistics of auto- prolongations and top-ups of longer deposits with the funds from shorter deposits after their expiration in case when the customers have more than one active deposit . The matching and/or controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Group . It is unusual for banks ever to be com- pletely matched since business trans- acted is often of an uncertain term and of different types . An unmatched position potentially enhances profita- bility, but can also increase the risk of losses . The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing li- abilities as they mature, are important factors in assessing the liquidity of the Group and its exposure to changes in interest and exchange rates . Operational Risk The Group is exposed to operational risk which is the risk of losses resulting from inadequate management and control procedures, fraud, poor business decisions, system errors relating to em- ployee mistakes and abuse by employees of their positions, technical failures, settlement errors, natural disasters and misuse of the Group’s property . The Group has established internal control systems intended to comply with Basel guidelines and the CBR’s require- ments regarding operational risk . The Board of Directors adopts general risk management policy, assesses the effi- ciency of risk management, approves the Group’s management structure, adopts measures designed to ensure continuous business activities of the Group including measures designed for extraordinary and emergency situations and super- vises other executive bodies in respect of operational risk management . The Management Board generally oversees the implementation of risk manage- ment processes at the Group including relevant internal policies, adopts internal regulations on the Group’s risk manage- ment, determines limits for monitoring operational risks and allocates duties among various bodies responsible for operational risk management . Regular monitoring of activities is intended to detect in a timely manner and correct deficiencies in policies COVID-19 The existence of COVID-19 was con- firmed in early 2020 and has spread across China, to Russia and beyond, causing disruptions to businesses and economic activity . Governments in affected countries are imposing travel bans, quarantines and other emergen- cy public safety and fiscal measures . Those measures, though temporary in nature, may continue and increase depending on developments in the virus’ outbreak . The Group has put contingency plans in place both to protect the workforce and ensure that we mitigate the impact of COVID 19 . For instance, currently, our employees are mainly working from home due to travel restrictions imposed by governments . The ultimate severity of the Covid-19 outbreak is uncertain at this time, and therefore the Group cannot reasonably esti- mate the impact it may have on future operations . However, our technolo- gy systems continue to operate to the high levels we demand and the Group has high levels of both liquidity and capital reserves . Therefore, the Directors have concluded that there is currently no material impact on the Group’s operations and liquidity at the time of publication of this report as a result of COVID-19 . and procedures designed to manage operational risk, which can reduce the potential frequency and/or severity of a loss event . Dedicated the Group personnel track all problems the Group encounters in its operations and record all operation errors/issues and remedial measures taken on a special help-desk system . Reports on such errors or issues are sent to key managers and all such errors are issues are recorded in incident log . In order to minimise operational risk, the Group strives to regularly improve its business processes and its organisation- al structure as well as incentivise its staff . the Group insures against operational risks through several insurance policies that cover, among other things, property risks in respect of the Group’s offices, IT infrastructure and certain third-party liabilities . The Group has not experienced any ma- terial operational failures in recent years . In order to minimise potential losses from such failures, ensure business con- tinuity in case of disruption to IT systems and provide reliable and continuous access to business data and services, the Group’s IT systems are located in two dedicated data centres each connected to separate and independent power supply sources . Critical IT systems are operated in the most accessible, primary data centre with primary Tier-III facilities, while secondary systems and back up facilities are located in a physically separate data centre . Both data centres provide 24 hours a day, seven day a week, year round power, cooling, connec- tivity and security capabilities to protect mission-critical operations and preserve business continuity for IT systems . Moreover, the Group keeps additional hardware on its premises for back-up purposes and has stand-by servers for each key system, including active stand- by for critical systems such as process- ing and transaction authorisation . Data connections to the data centres are 100 per cent . reserved via separate physical lines . Anti-Money Laundering and Terrorist Financing Procedures As a member country of the FATF, Russia adopted the Anti-Money Laundering Law . Subsequent to the adoption of the Anti-Money Laundering Law, the CBR promulgated a number of anti-money laundering regulations specifically for the banking sector . The Group has adopted internal regu- lations on anti-money laundering that are based on, and are in full compliance with, the requirements of the Russian an- ti-money laundering regulations, related instructions of the CBR and international standards . The supervision of the Russian anti-money laundering regime is shared by the CBR and the FSFMT . The Group has created a specialised unit and appointed an authorised officer who coordinates activities aimed at preventing money laundering and terrorism financing . The Group conducts identification and review of its customers, customer’s rep- resentatives, beneficiaries and beneficiary owners, money laundering and terrorism financing risk management, personnel training as well as daily analysis of bank- ing operations, verifies information on operations that are subject to monitoring and sends all required information to the relevant state authorities . Employees of the Group have to take mandatory training on the Group’s policies and pro- cedures for preventing money laundering and terrorism financing both as part of the initial training after being hired and as part of the subsequent training activities . Mandatory internal control checks are conducted by the Group’s Internal Control Service . External control is provided by the CBR and, within an annual audit, by a statutory auditor . The Group cooperates with the FSFMT by timely addressing their requests regard- ing certain entities or operations . 36 37 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019CORPORATE SOCIAL RESPONSIBILITY TCS Group contributes to the achievement of the 17 Sustain- able Development Goals adopted by the United Nations . We also strive to be an environmentally friendly company and in 2019 launched several environmental initiatives for our em- ployees . The Company's DNA is particularly closely aligned to the following goals: – GOOD HEALTH AND WELL-BEING; – HIGH QUALITY EDUCATION; – HEALTHY WORK ENVIRONMENT AND ECONOMIC GROWTH; – INDUSTRY, INNOVATION AND INFRASTRUCTURE. Tinkoff Moscow open 2019 GOOD HEALTH AND WELL-BEING In 2019, we launched T-life, a comprehensive programme that covers 5 key elements of well-being (physical health, emotional comfort, professional development,personal finances and social life) . The initiative is aimed at devel- oping employees and increasing involvement in corporate programmes . Support for sports initiatives In 2019, Tinkoff continued to actively support sporting events and promote action sports in Russia . The three largest and most important events supported by the Company have been gaining in popularity every year: 1 Tinkoff Rosafest alpine ski festival Tinkoff Rosafest 2019 key results: – more than 12,000 attendees; – of whom more than 2,000 took part in The Game quest; – more than 10,000 prizes; – more than 1,600,000 online viewings of the night free- style show . 2 Quiksilver NewStarCamp snow festival More than 5,000 participants Tinkoff sponsored the construction of Russia’s largest snow park for athletes and snowboarding enthusiasts featuring kicker lines of two levels of difficulty, a very large big-air course, two downhill tracks and 30 various surfaces for jibs . The professional freestyle competitions which were a part of Quiksilver New Star Invitational Powered by Tinkoff were traditionally held on the 20-metre springboard . 3 Tinkoff Moscow Open Basketball Tournament in Gorky Park: – 20,000 fans; – Professional tournament featuring 16 men's and 6 women's teams; – Amateur tournament featuring 407 teams (1,628 people); – About 200,000 viewings . In order to maintain the Company’s path towards well-being, Tinkoff organises and supports various environmental initiatives 1) In all Tinkoff offices, we have been collecting plastic caps for the second year in a row as part of the Dobrye Krishechki charity project . The project was organised by the“Otkazniki . Volunteers to Help Orphans” Charitable Foundation . The caps are handed over to a plastics processing plant, and wheelchairs and supplies for foster children with disabilities are purchased with the proceeds . In 2019, we collected more than 500 kg of plastic caps . The fund directed the proceeds to purchase a wheelchair for a child from a foster family . 2) At all Tinkoff offices, we have been collecting used batteries . In 2019, we were able to collect and hand over for recycling more than 200 kg of batteries . 3) Charity Garage Sale for the Second Wind Charitable Foun- dation and Charity Shop(Vtoroe Dihanie) . The foundation implements an environmental programme for the process- ing of non-waste clothing . We welcome the personal responsibility and initiatives of em- ployees and do our best to facilitate them . Tinkoff sometimes helps by providing additional funds or allowing the use of its premises, as well as coordination and organizational support . The following is just a snapshot of the many such events, right across Russia . For two weeks, Tinkoff employees brought books, electronics, and various other items which they no longer needed, and set the expected value for these items . After the items were sold, donations from Tinkoff’s employees were reflected on participants’ personal cards . After the sale, Tinkoff recommended donating at least 50% of the amount which had been received . Each employee independently decides what percentage of the proceeds to donate . Together we managed not only to have a good time, but also to find new owners for various items and gadgets that were brought in, as well as to sign New Year's greeting cards for elderly people with no relatives . The event was attended by more than 150 employees who collected and donated more than 100 kg of clothes, shoes, gadgets and books for low-income families in the regions, and also collected 116,500 rubles of donations for charities . One Tinkoff employee, who is also a volunteer environmental consultant, held a public environmental talk on personal responsibility for the environment, sustainable consumption and the cyclical economy . “Good bottlecaps” ( “Dobrye Krishechki”) project at Tinkoff Group offices 4) More than 300 employees took part in fundraising efforts ahead of the New Year . Employees took part in the Be Useful in 2020 campaign (S polzoy v 2020), during which they raised over 346,000 rubles in favor of four charitable foundations . Children supported by the Find a Family charity founda- tion (Naydi Semiu), orphans from foster care received much-needed medicines, medical examinations, special spectacles frames, therapeutic massage, as well as classes with a phlebologist and neuropsychologist . Сhildren with mental illnesses supported by the Masters and Margarita social workshop received essential materials for the workshop: utensils and everything for baking, tools for modeling and drawing . Children with Down syndrome and mental illnesses support- ed by the Centre for Clinical Education (Tzentr Lechebnoy Pedagogiki) received the necessary materials for classes: developmental and educational books, albums, paint sets and felt-tip pens for drawing . 38 39 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 CONTINUED CORPORATE SOCIAL RESPONSIBILITY Fintech school and internship graduation ceremony HIGH QUALITY EDUCATION Tinkoff educational programmes for schoolchildren and students 2019 was the fourth year of the successful implementation of Tinkoff educational programs for schoolchil- dren and students . The main goal of educational programmes is to show best industry practices to the most talented and motivated schoolchildren, university students and graduates from all over the Russian Federation . All programmes are free . Tinkoff Educa- tion has had a government license for educational activities since July 2019 . 1) Tinkoff Fintech – blended learn- ing IT and analytics courses for students . In 2019, we organised 40 courses for students and graduates in 8 cities (Moscow, Saint Peters- burg, Izhevsk, Ekaterinburg, Nizhniy Novgorod, Novosibirsk, Rostov- on-Don, Ryazan) with more than 1,000 participants . 526 students successfully completed the courses, and 116 were hired by Tinkoff . We offered 18 unique courses such as Front-end development, iOS & Android, Python, Kotlin, Scala, Java to Scala, QA Automation, Site Reli- ability Engineering (SRE), Product Design and Project Management in Fintech and Product Analysis, and others . 5) About 40 employees went to a home near Moscow for seniors with no relatives and disabled people to wish them a Happy New Year . The em- ployees together with their children organised a concert, sang, danced, and recited poems . Then they all played board games together and exchanged warm wishes . For the Old Age in Joy Foundation (Starost v radost), New Year's gifts were purchased for 67 seniors . For those bedridden, the organisations purchased much needed hygiene and medical supplies . All gifts were bought with donations from our employees . 6) Colleagues from the regions organ- ise local social events . For example, employees from Yekaterinburg went to a home for seniors wih no relatives and people with disabilities together with Old Age in Joy Foun- dation (Starost v radost) . Employees from St . Petersburg organised a fundraiser to purchase equipment for the Lisa Alert search- and-rescue volunteer organisation . In addition, employees raised funds to buy hygiene products for the Ad- Vita fund that helps cancer patients . 7) For the first time, in December 2019, a Charity New Year Fair was held in all of Tinkoff’s Moscow offices . More than 500 employees took part in the event . 11 charitable foun- dations brought their New Year's souvenirs and gifts . The foundations managed to collect donations of over 350,000 rubles . In this way, we helped foundations helping orphans, seniors with no relatives, children with mental illnesses, hospices for adults and children, social work- shops for disabled people and single mothers . 8) Tinkoff shares the importance of consumer awareness and environ- mental responsibility . In the Com- pany’s offices, the amount of paper workflow is minimised . In October 2019, we changed the manufactur- er of office paper . The paper now used is certified according to two environmental standards, FSC and EU Ecolabel . 40 First MIPT-Tinkoff Masters program graduating class 2) Tinkoff Generation – blended learning informatics and mathe- matics classes for schoolchildren . We have 4 streams for schoolchil- dren: Mathematics for Olympiads, Algorithms and data structures, Machine learning and Deep learning in 7 cities (Moscow, Saint Peters- burg, Izhevsk, Ekaterinburg, Nizhniy Novgorod, Rostov-on-Don, Ryazan) . We worked with 549 schoolchildren 82 of whom became participants of the All-Russian Student Olympiad in mathematics, informatics, econom- ics, physics and even astronomy . The All-Russian Student Olympiad is the most prominent and well-known competition for schoolchildren in Russia . Last year 39 school stu- dents we work with participated in the All-Russian Student Olympiad, 5 of them won gold medals and 12 won silver medals in informatics, one student also won the silver medal in mathematics . Tinkoff Generation today is the biggest community of gifted and motivated schoolchildren under the patronage of a private business company . 3) Partnership with Educational Centre Sirius . Sirius is the top govern- ment-initiatiated project for sup- porting talended children . Tinkoff is a partner at the Big Challenges Programme which is the largest scale programme for schoolchildren in Russia aimed at innovation in priority scientific and technologi- cal areas . In July 2019, a group of schoolchildren under the mentor- ship of our employees produced a prototype of an optimisational algorithm and an app for sched- uling meetings between Tinkoff’s representatives and clients . This prototype was implemented and successfully tested in two small towns: Tula and Saransk . 4) Additionally, Tinkoff has two annual programs for students . In 2019, these programs included Project management and Analytics in Fintech and a two-week educational module held in April and November . 5) Tinkoff Academy – educational programs for Universities . We have a master’s degree programme in partnership with the Moscow Institute of Physics and Technology . There are three majors:: Machine Learning, Analytics and Scala Development . We also introduced two new courses at the Department of Mechanics and Mathematics at Moscow State University: Applied data analytics and Industrial data science . 6) We also support Summer computer school and other summer and win- ter schools for schoolchildren in dif- ferent regions of Russia . We share both financial aid and organisational support and expertise with different locals Olympiads in informatics and mathematics . Finopolis youth program hackathon 41 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 CONTINUED CORPORATE SOCIAL RESPONSIBILITY HEALTHY WORK ENVIRONMENT AND ECONOMIC GROWTH We create jobs for many thousands of throughout all parts of Russia In addition, we gave 1,050 New Year's gifts for our partners made by regional social enterprises united by the Buy Social team . The honey that we ordered for the gifts gave work to seniors in the village of Maly Turysh in the Urals . Chocolate with honey that we purchased for the gifts was produced by people with disabilities in the village of Gagarinskaya new settlement near the city of Pereslavl . Christmas toy lanterns were made by people with mental illnesses in the Artel of the blessed workshop . Tinkoff spent nearly 900,000 rubles on this project , which provided work for these people . In early February of 2020, 30 work computers and com- puter parts were donated to a charity in Ryazan . Tinkoff’s Ryazan office helped the social services center in Ryazan and the Ryazan region . The center is supervised by the charity foundation Starost v radost (Old Age in Joy) and provides assistance to seniors with no relatives in their region . INDUSTRY, INNOVATION AND INFRASTRUCTURE 1) We continue to promote various charitable foundations among our customers . In 2019, the number of chari- table non-profit organisations customers may provide donations for increased from 168 to 294 . Customers can make a donation through Tinkoff .ru or our mobile appli- cation, both in the form of regular payments throughout the year and/or a one-time fixed contribution . In 2019, the number of money transfers to charitable foundations by our customers increased from 34,000 to 72,000 . Tinkoff Bank does not charge a commission on these payments . 2) Through our projects, we help a large number of people recognise and participate in solving social problems . From 5 April to 30 December 2019, Tinkoff was involved in a joint project with the Gift to Angel Charitable Foundation “The most important thing is to dream!” is a project aimed at socialising and motivating children with developmental disabilities . Charity New Year Fair for employees The main objective of the project is to draw people’s attention to the problems of children with special devel- opmental needs . As a result people become more socially responsible, open to charity work, and accepting of these children . The project aims at making charity work popular, at changing people’s attitude towards children with special needs, as well as actively involving and motivating children with developmental disabilities . Gift to Angel is a charitable foundation engaged in sys- temic assistance to single-parent and low-income families with children with cerebral palsy and other musculoskele- tal disorders . 3) As part of a marketing campaign held on the children's channel Car- ousel, Tinkoff organised work with children with cerebral palsy . With the help of Tinkoff, which donated 1,380,000 rubles, the foundation was able to start producing com- mercials with the children support- ed by the foundation who were featured in a programme sponsored by the Company . This cooperation was aimed at raising awareness of the foundation’s work and attract- ing further donations . The weekly broadcasts reached 4 million people and featured a link to the founda- tion’s website where people could make a donation . 4) The Tinkoff team and the World Wildlife Fund (WWF ), in partnership with whom we created in 2018 the Tinkoff - WWF credit card, share common views on creating resources for nature conservation and animal welfare, as well as values associated with a socially responsi- ble, healthy lifestyle . Every year the fund reports on the work it has accomplished, and our main result is that Tinkoff clients made great contributions to the processes of development and con- servation of Russia's biological and forest diversity, the principles of a green economy and climate change prevention . 5) In 2019, Tinkoff continued to provide crucial support to 5 non-profit organisations . Altogeth- er, 7,100,000 rubles were donated . These funds helped various socially vulnerable groups and their sup- porting organisations find system- atic solutions to the challenges they face regularly: – – – – – The Conjointment Charitable Foun- dation (So-Edinenie) helps adult deaf and blind disabled community; The Center for Clinical Pedagogy (Tsentr Lechebnoy Pedagogiki) is engaged in the training and rehabilitation of children with developmental disabilities (Down syndrome, autism, etc .); Charity Medical Center (Meditsin- sky Tsentr Miloserdie) provides palliative care for dying children; The Old Age in Joy Charity Foun- dation (Starost v radost) supports lonely elderly people and people with disabilities living in public institutions; Zhuravlik Charitable Foundation is engaged in inclusive education for children and anti-bullying pro- grammes in Russian schools . Tinkoff is very selective in choosing brand partners for joint banking products . It is important for us that the partner not only offers custom- ers the highest level of service and impeccable quality of products and services, but also that they share the values of the Tinkoff ecosystem . Tinkoff-WWF cardholders are socially responsible people who are concerned about the future of the planet . Most of them make regular donations to organisations to protect nature from climate change, participate in volunteer projects and seek to contribute to nature preservation, including through pur- chases with the Tinkoff WWF card, since a portion (1% of total custom- er purchases) goes to fund support programmes for rare species of animals and their habitats . We also launched a special pro- motion: when cardholders donate 900 rubles or more, Tinkoff will reimburse part of the charitable contribution back to the card (900 rubles for credit card holders and 200 rubles for debit card holders) . The Tinkoff-WWF Eco-Card is made from renewable, environmental- ly friendly materials, is easy to process and does not pollute the environment . In 2019 alone, Tinkoff-WWF cardholders donated more than 2,000,000 rubles through their purchases . 42 43 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 EMPLOYEES AND CORPORATE SOCIAL RESPONSIBILITY Tinkoff Team Throughout 2019, we continued to hire the best professionals on the market to support our new and existing business lines . By the end of 2019, the Group’s headcount totalled more than 24,700 people, with 12,300 being permanent office-based employees and 12,400 employees working remotely . Mathe- maticians and IT specialists account for 70% of the total headcount at Tinkoff headquarters . TCS Group average employment term is more than three years, with 12% of employees having worked at the Company for over five years . The share of vacancies filled internally is 15%, and the average period of reviewing new candidate applications ranges from three to five days . According to a study by Banki . ru, Russia’s leading financial portal, 62% of the Company’s employees post positive employee feedback . Our team is still among the youngest on the market: the average age of employees Group-wide stands at 28 years . Human resources: key principles TCS Group has adopted an unconven- tional recruitment approach . Lack of finance or banking background is often viewed as an advantage . We hire peo- ple with no stereotypes who are eager to reshape the financial services land- scape . People with an analytical mind and the ability to handle huge amounts of data are our first choice . The Group’s recruitment policy focuses on: • bringing together smart people with analytical experience; • a transparent structure with zero tol- erance of bureaucracy or hierarchy; • a smart working environment; • an effective learning environment; • encouraging initiative and taking on responsibility; • creativity and open dialogue be- tween employees; • promotion of team spirit and entre- preneurial culture; • broad employee capabilities and delegation of responsibility; • an environment where employees can experiment, make mistakes and learn lessons; • promotion of the Test and Learn framework . • In line with our Test and Learn ap- proach, we test many concepts and implement the most successful . Our employees are not afraid of making mistakes and failures: in our quest for the most successful models we support any experiments and promote open communication between col- leagues . We welcome innovative ideas to solve challenges in many different ways, and we believe in creating an en- vironment that grants talented people with far-reaching authority . Greater rights and opportunities for our team is a crucial element of our success . To deliver on the Group’s objectives, we use various channels to facilitate communication between employees, in- cluding email, online chats, meetings and other forms . Any employee can address anyone in the Company regardless of their position . Recruitment We seek to recruit the best talent on the market using various tools to motivate and retain team members . Tinkoff recruits via advertising and job sites, student forums, social networks and other online channels . We actively look for the best students at the top national and global universities, including winners of com- petitions in mathematics, physics and programming . We offer career growth and training opportunities for professionals at every level . We focus on attracting the best talent from leading tech companies, and strive to increase the share of specialists from the Russian regions among our new hires . Our recruitment team is actively expanding the hiring of technical special- ists throughout the Russian Federation . In 2019, we hired 361 people across our regional units, bringingthe number of developers and testers in the regions to parity with the number of the same experts in HQ . As we aim to make Tinkoff a top employer of choice, we are already seeing fruits . The Сareer .habr .com platform, which offers vacancies in the IT industry, ranks Tinkoff ahead of Mail .ru, Yandex and Sberbank . Departure of volunteer employees to an old people’s home on New Year’s Eve. Tinkoff Training Center Tinkoff Training Center achieved the following results in 2019: 1) We organised and held 2,854 educational events, including 1,337 offline and 1,517 online; 2) 13,007 people were trained, includ- ing 1,043 managers and 12,034 specialists; 3) Average rating of events by partici- pants was 4 .7 out of 5; 4) We have carried out 125 electronic courses on soft and hard skills; 5) Career coaching for high-potential employees reached 42 people, with 10 meetings organised for each, while our NPS was 9 out of 10; 6) Life coaching sessions were attend- ed by 61 team members . NPS was 9 out of 10; 7) Mentors within the company were selected for more than 100 people; 395 employees attended external trainings . Compensation and incentives TCS Group offers its employees a unique working environment and a transparent system of career growth . We provide fixed-rate salaries and bonuses, regularly assess employees performance against KPIs, determine the amount of compensation and give feedback for future career develop- ment . TCS Group has a market-based salary structure, with KPI-related pay rises and bonuses . In January 2019, the Board of Direc- tors approved an expansion of the Group’s long-term management incen- tive plan . In particular, the number of participating employees was increased from 83 to 91 people (starting 31 Jan- uary 2019) with relevant awards grant- ed to newly added participants . The target equity pool for the programme participants amounts to 5 .1% of the Group’s issued share capital . Each MLTIP wave is awarded over six years and is subject to meeting annual KPIs . Tinkoff Training Center specialists conduct training for employees All programme participants are the Group’s permanent employees based in Russia . As the Group continues to grow and diversify, the aim of the expand- ed long-term management incentive plan is to better align the interests of the management with those of the shareholders in order to increase the Group’s value . Tinkoff took 4th place in the Forbes Woman ranking of the 25 Best Compa- nies in Russia for Female Professionals, published in February 2020 . Among IT companies and banks, Tinkoff has the highest ranking . The metrics consid- ered included gender composition, remuneration, career opportunities and corporate programmes . Diversity and inclusion Health and safety Tinkoff Bank’s flexible business model, based on a high-tech contactless plat- form, allows individuals with disabilities to join our team . This helps us expand and diversify the Group’s recruiting pool and recruit people based on professional skills and merits . In 2019, we continued developing our home call centre where people can work for the Company at any hours and locations convenient for them . This working format is suitable for those residing in remote areas with limited access to transportation as well as for those who can only work remotely (for example, for women on maternity leave) . 12,400 people throughout the country worked at our home call centre as at the end of 2019 . They also include individuals with disabilities who are able to choose work hours and locations that suit their circumstances . These employees are trained online, and all the necessary corporate tools and materials are stored on a special cloud platform . TCS Group creates a safe and com- fortable work environment for its employees in full compliance with Russia’s labour laws . We offer annual medical check-ups, vaccinations, volun- tary health insurance, free membership in our in-house fitness gym located at Tinkoff Bank’s headquarters, and other healthcare benefits . TCS Group encourages a healthy lifestyle and regularly holds corporate competitions in football, volleyball, basketball, alpine skiing and chess . In 2019, we launched T-life, a com- prehensive solution that covers 5 key elements of well-being (physical health, emotional comfort, professional development, personal finances and social life) . The programme is aimed at developing an employee and increasing involvement in corporate programmes . 44 45 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019BOARD OF DIRECTORS Constantinos Economides (44) Chairman of the Board of Directors Constantinos Economides has been a director of TCS Group Holding PLC since November 2008 and Chairman since June 2015 . Mr . Economides is also the Managing Director of Royal Pine & Associates Ltd since January 2016 . He was previously the Managing Director of Orangefield Cyprus from October 2006 to December 2015 . Prior to 2006, he worked with Deloitte Ltd in Cyprus from 2003 to 2006 and Ernst & Young in the United Kingdom from 1999 to 2002 . Mr . Economides is a Fellow Member of the Institute of Chartered Accountants in England & Wales (ICAEW) and holds an MSc in Management Sciences from Warwick Business School, United Kingdom . In addition, he is a Licensed Insolvency Practitioner of the Institute of Certified Public Accountants of Cyprus (ICPAC) since October 2015 . Directors of the Company with the external auditors at the Company’s offices in Limassol. Left to right: Martin Cocker (Director), Jacques Der Megreditchian (Director), George Kazamias and Tommys Stavrou (PwC), Constantinos Economides (Chairman of the Board), Alexios Ioannides (Director) and Mary Trimithiotou (Director) Alexios Ioannides (43) Member of the Board of Directors Alexios Ioannides has been a director of TCS Group Holding PLC since November 2008 . Mr . Ioannides previously worked for Deloitte from 2001 to 2008 where he trained and qualified as a Chartered Accountant in 2004 . Mr . Ioannides is also a mem- ber of the Board of Directors of The Copperlink Partners Limited (since 2015) . Jacques Der Megreditchian (60) Member of the Board of Directors Independent Non-Executive Director Chairman of the Remuneration Committee Member of the Audit Committee Jacques Der Megreditchian has been a non-executive director since October 2013 . Mr . Ioannides is a fellow member of the Institute of Chartered Accountants in England & Wales (ICAEW) and a member of the Institute of Certified Public Accountants of Cyprus (ICPAC) and holds a BSc . in Business Administration from the University of Alabama, USA . Mr . Der Megreditchian previously served as Chairman of the Exchange Council of the Moscow Exchange . Mr . Der Megreditchian has over 30 years of experience in finance from CCF, Societe Generale and Troika Dialog where he held the position of Chief Business Officer . Mr . Der Megreditchian holds a degree in business administration from the European Business Institute, France and in financial analysis from the French Center for Financial Analysis, France . Martin Cocker (60) Member of the Board of Directors Independent Non-Executive Director Chairman of the Audit Committee Member of the Remuneration Committee Maria Trimithiotou (42) Member of the Board of Directors Martin Cocker has been a non-executive director since October 2013 . Maria (Mary) Trimithiotou has been a director since May 2012 . Mr Cocker also serves on the boards of Etalon Group plc, Beverley Building Society, Nostrum Oil and Gas PLC and Headhunter Group plc . Mr . Cocker previously held positions at Ernst & Young, Amerada Hess, Deloitte & Touche and KPMG in the United Kingdom, Russia and Kazakhstan . Mrs . Trimithiotou previously worked for Deloitte Ltd holding the position of audit manager from October 2001 to February 2009 and, subsequently, moved to Orangefield Fidelico Ltd where she held the position of Director from 2012 until 2015 . Currently, Mrs . Trimithiotou is a member of the Board of Directors of Royal Pine & Associates Ltd since 2016 . Mr . Cocker is a member of the ICAEW and holds a bachelor of science (joint honours) degree in mathematics and economics from the University of Keele, United Kingdom . * Philippe Delpal served last year as a non-executive Director and member of the Audit and Remuneration Committees (from 1 January to 16 August 2019). Mrs . Trimithiotou is a Fellow Chartered Certified Accountant and a Member of the Association of Chartered Certified Account- ants, as well as Member of the Institute of Certified Public Accountants of Cyprus (ICPAC) . Mrs . Trimithiotou is also a Licensed Insolvency Practitioner (from October 2015) . 46 47 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019TINKOFF GROUP: DECISION MAKING BODIES AT A GLANCE Decision making body TCS Group Holding PLC (Cyprus) Board of Directors Tinkoff Bank Board of Directors Tinkoff Bank Management Board Members (2/4/2020) Relationship to other key governing bodies Key powers Number of meetings in 2019 Constantinos Economides (Chairman) Appoints members of the Tinkoff Bank Board of Directors . -Provides leadership and oversight to the Group within a framework of prudent and effective controls which enable risk to be assessed and managed; 10 Mary Trimithiotou Alexios Ioannides Martin Cocker (INED) Jacques Der Megreditchian (INED) The Company is sole shareholder of Tinkoff Bank and determines all the matters reserved to shareholders . -Sets the Group’s strategic objectives and ensures the necessary financial and human resources are in place for the Group to meet its objectives; -Appoints the Group’s external auditors; -Sets the Group’s values and standards and ensures its obligations to shareholders/investors and other stakeholders are understood and met; -Reviews management performance; -Decides the Group’s remuneration policy; -Approves the Group’s credit policies: -Makes the Group’s dividend policy and decides the level of dividends . A more detailed description can be found on pages 50-53 . Stanislav Bliznyuk (Chairman) Appoints and oversees the Tinkoff Bank Manage- ment Board -Determines the strategic priorities of the Bank; 24 Oliver Hughes Sergey Pirogov Vadim Stasovsky Svetlana Ustilovskaya (Independent) Oliver Hughes (Chairman) Reports to the Tinkoff Bank Board of Directors Valeriya Pavlyukova Anatoliy Makeshin Evgeniy Ivashkevich Ilya Pisemsky Natalia Izyumova -Approves capital markets operations of the Bank, major and related party transactions, risk and capital management strategy, procedures for managing conflicts of interest, HR policies, employee and management compensation and bonus policies; -convenes annual and extraordinary meetings of shareholders, decides on the agenda and the record date for meetings; -Recommends dividends; -Determines the Bank’s asset, liability and risk management operations, policies and proce- dures; 44 -The Chairman appoints the members of the Finance, Credit, Technology and Business Develop- ment Committees . The decisions of these Committees frame most of the day to day operations of Tinkoff Bank . A more detailed description can be found on page 28 . 48 49 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 CORPORATE GOVERNANCE Overview The Board of directors Global Depositary Receipts (GDRs) of TCS Group Holding PLC (a Cyprus incorporated company), with each GDR issued under a deposit agreement dated on or about 24th October 2013 with JPMorganChase Bank N .A . as depositary repre- senting one Class A share, are listed on London Stock Ex- change . The Company’s GDRs are also listed on the Moscow Exchange . No shares of TCS Group Holding PLC are listed on any exchange . The Company is required to comply with the UK corporate governance regime to the extent it applies to foreign issuers of GDRs listed on London Stock Exchange . The Company has not adopted corporate governance measures of the same standard in all respects as those adopted by UK incorporat- ed companies or companies with a premium listing on the London Stock Exchange . As the Class A shares themselves are not listed on the Cyprus Stock Exchange (or elsewhere), the Cypriot corporate governance regime, which only relates to companies that are listed on the Cyprus Stock Exchange, does not apply to the Company and accordingly the Company does not monitor its compliance with that regime . The role of the Board is to provide entrepreneurial leadership to the Group within a framework of prudent and effective controls which enables risk to be assessed and managed . The Board sets the Group’s strategic objectives, ensures that the necessary financial and human resources are in place for the Group to meet its objectives and reviews management’s per- formance . The Board also sets the Group’s values and stand- ards and ensures that its obligations towards the sharehold- ers and other stakeholders are understood and met . The Board operates under a formal schedule of matters reserved to the Board for its decision, approved by share- holders in 2013 . The authorities of the members of the Board are specified by the Articles of Association of the Company and by law . The current five strong Board of directors is comprised of three executive directors including the chairman, and two non-ex- ecutive directors both of whom are independent . Other than the retirement of Mr Philippe Delpal on 16 August 2019, there was no change in the composition of the Board or sta- tus of the directors in 2019 . The Board of directors currently contains no Directors B . The Company’s Home State is Cyprus . A description of the terms and conditions of the GDRs can be found at ‘Terms and Conditions of the Global Depositary Receipts’, ‘Summary of the Provisions relating to the GDRs whilst still in Master Form’ and ‘Description of Arrangements to Safeguard the Rights of the Holders of the GDRs’ in the Prospectus issued by the Company dated 22 October 2013 and on the website at www .tinkoff .ru/eng . Copies of the Articles of Association of the Company adopted on 21 October 2013, the terms of reference of the Committees, and other corporate governance related as well as investor relations related materials can also be found on the website www .tinkoff .ru/eng, at the Company’s main website www .tcsgh .com .cy, on the Company’s page on the London Stock Exchange website (www .londonstockexchange . com/exchange/prices-and-markets/stocks/summary) and at the official site of the Department of Registrar of Companies, Cyprus (http://www .mcit .gov .cy/) . The longest serving director Mr Constantinos Economides took over the role of Chairman of the Board of directors in June 2015 . The names of the people who served on the Board during 2019 are listed at on the next page . The Group has established two Committees of the Board . Specific responsibilities have been delegated to those com- mittees as described below . The Board is required to undertake a formal and rigorous review annually of its own performance, that of its commit- tees and of its individual directors . That review was recently carried out, in-house, in relation to 2019, looking at overall performance . All directors completed detailed question- naires on the Board’s, the committees’ and individual direc- tor’s performance . Analysis of the resultant feedback, which was discussed at a meeting of the Board of Directors in early 2020 did not show up any deficiencies in the performance of the Board, its committees or individual directors of a nature that required changes to be made . The Board has not appointed a senior independent director . There are only two independent directors of whom at least one will retire each year . The role of appraising the Chairman of the Board for FY2019 was performed by the Chairman of the Audit Committee . 50 THE ROLE OF THE BOARD IS TO PROVIDE LEADERSHIP TO THE GROUP WITHIN A FRAMEWORK OF PRUDENT AND EFFECTIVE CONTROLS WHICH ENABLES RISK TO BE ASSESSED AND MANAGED. Number of directors Director's powers Dear stakeholders Unless and until otherwise determined by the Company in general meeting, the number of directors shall be no less than four, of whom two must be non-executive, and shall not exceed seven, so long as Class B Shares are in issue . There- after there shall be no maximum number of directors . The Articles of Association of the Company provide for the retirement by rotation of certain directors at each Annual General Meeting . At the AGM 2019 the two directors who retired by rotation were Mr Martin Cocker and Mr Philippe Delpal . Mr Philippe Delpal did not put himself forward for consideration for re-appointment at the AGM and conse- quently retired as a director, on 16 August 2019 . Mr Martin Cocker was duly reappointed by vote of the shareholders . The business of the Company is managed by the directors, who are empowered to exercise all such powers of the Company as are not, by the Cyprus Companies Law or by the Articles of Association, required to be exercised by the shareholders in general meeting, subject nevertheless to any provisions of the Articles of Association, of the Cyprus Companies Law and of any directions given by the general meeting by ordinary resolution; but no alteration of the Arti- cles of Association and no direction made by the Company in general meeting shall invalidate any prior act of the directors which would have been valid had that alteration or direction not been made or given . Proceedings of the Board of Directors The quorum necessary for the transaction of the business of the directors shall be at least four directors . Questions arising at any meeting of the Board of directors shall be decided by a majority of votes . In the case of equality of votes, the chairman shall have a second or casting vote . A director may, and the secretary on the requisition of a director shall, at any time, summon a meeting of the directors . A resolution in writing signed or approved by letter, telex, facsimile or telegram by all directors or their alternates or in relation to a committee by all its directors, shall be as valid and effectual as if it had been passed at a meeting of the Board of directors or (as the case may be) at a committee meeting duly convened and held . Any such resolution in writing signed may consist of several documents each signed by one or more of the persons described . Any notice shall include an agenda identifying in reasonable detail the matters to be discussed at the meeting together with copies of any relevant documents . The directors may delegate any of their powers to a committee or committees consisting of one or more members of their body as they think fit; any committee so formed shall, in the exercise of the powers so delegated to it, comply with the rules which may have been imposed on it by the directors, in respect of its powers, composition, proceedings, quorum or any other matter ATTENDANCE TABLE FOR BOARD OF DIRECTOR AND COMMITTEE MEETINGS FY2019 Director Board Attendance FY2019 AC Attendance FY2019 RC attendance FY2019 Constantinos Economides (Chairman) Maria Trimithiotou Alexios Ioannides Martin Cocker Philippe Delpal (retired 16 August 2019) Jacques Der Megreditchian 10/10 10/10 10/10 9/10 0/9 10/10 n/a n/a n/a 5/5 0/4 5/5 n/a n/a n/a 5/5 1/4 5/5 51 I am happy to report very strong results for FY2019. This follows outstanding financial performance in 2016, 2017 and 2018. This accompanied substantial growth in our customer base and net loan portfolio, as we continued to deliver record high quar- terly and full year profits and secured important technological milestones. Tinkoff has delivered another truly excellent year, the result of our dedication to product, interface and customer service. A key focus of 2019 has been further building out the Ecosystem and expanding our non-credit business lines, making the business more sustainable. I would like to bring to your attention here, if you want to get a fuller understanding of Tinkoff and our 2019, the illuminating reviews found elsewhere in the Report, from Group CEO Oliver Hughes and Group CFO Ilya Pisemsky. We have had a run of great years; but the competition are not asleep, Big Tech players are entering the financial arena and the Russian and international environments become ever more demanding. We have not forgotten though the recession of 2014/15, remember more difficult years when the good news was harder to find. In my report I would like to offer my particular praise and thanks to the Tinkoff Management team, who have stuck together and delivered outstanding financial performance in the business for a decade or more, in good times and not so good. This is no ‘fair weather’ team, but a team for all seasons. As 2020 is shaping up to be a more turbulent, volatile and challenging year, I can’t think of a better qualified or more able and committed group of managers to steer the Group through to calmer waters. I believe though the Management team will do more, much more than that-that very turbulence and volatility I mentioned will tend to disrupt the current order of things, allowing the nimblest and best placed players like Tinkoff to play to our strengths. Such periods are not just a time of cleansing the market, but a time when we can come up with new solutions, new ideas for growth. History shows that Tinkoff has been through two very severe crises and emerged stronger each time. That management team has been broadened and deepened recently with some exceptional lateral hires and internal promotions so is even better placed to deliver for our stakeholders. So I am convinced we will do so again. Inside the Group the work of the Board of Directors carries on as ever, though the Group is a much larger and more diverse business than when I became Chairman in 2015. Still the same fundamental corporate governance principles apply. While the legal obligations for example on transparency and disclosure increase year on year, it has always been our approach to go beyond the minimum. This year as part of the process of identifying and interviewing candidates to join the Board, we have picked up some pointers on how others operate; this together with greater investor feedback generally not only on aspects of the way we do business as a responsible lender but on the way our decision-making bodies interact has led us to reformulate some of the disclosures in this Report, in our latest Non-Financial Information and Diversity Statement due for release by June and on our website, to make them more reader-friendly. We expect to announce further corporate governance enhancements in the coming months. We welcome feedback from all our stakeholders at any time, whether via our dedicated address stake- holderengagement@tcsgh.com.cy, or through our IR and PR teams, or direct to senior management –please let us have your views. Be assured all feedback is considered at the very highest levels of management. In this first quarter the Board as it always has, conducted its annual self-appraisal process, covering the Board as a whole, its Committees and individual directors. No significant deficiencies were identified. This time many of the ideas focused on streamlining internal corporate governance mechanisms and compliance processes reflecting the rapid expansion of the Group which although important have less external visibility; a programme for their phasing-in is being actively worked on. Lastly my thanks to all those who have made a contribution to the Tinkoff success story-our Founder Oleg Tinkov, our great Management team, our partners, investors and other stakeholders as well as our expanding base of customers. I am confident 2020 will bring further great achievements. I wish you all a safe 2020. Constantinos Economides Chairman of the Board of Directors STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019STRATEGIC REVIEW DIRECTORS’ REVIEW FINANCIALS CONTINUED CORPORATE GOVERNANCE Committees of the Board of directors The Company has established two Committees of the Board of directors: the Audit Committee and the Remu- neration Committee . Their terms of reference are summarized below . Both Committees were formed in October 2013 . The Board reserves the right to amend their terms of reference and arranges a periodic review of each Committee’s role and activities and considers the appropriateness of addi- tional committees . Committees- current composition The Audit Committee is chaired by an independent non executive director Mr Martin Cocker, and had until 16 August 2019 two other members both non executive directors, one of whom was independent . From 16 August 2019 the Audit Committee was comprised of its chairman Mr Martin Cocker and one independent non executive director . The Remuneration Committee is also chaired by an independent non execu- tive director Mr Jacques Der Megred- itchian, and had until 16 August 2019 two other members both non executive directors, one of whom was independ- ent . Details of the non executive and independent non executive directors are set out under Board of Directors on page 47 . From 16 August 2019 the Remuneration Committee was com- prised of its chairman Mr Jacques Der Megreditchian and one independent non executive director . The current terms of reference of both Committees are available to the public and can be found on the Group’s website . A short summary of both is set out below . Role of the Audit Committee The Audit Committee’s primary purpose and responsibility is to assist the Board in its oversight responsibilities . In executing this role the Audit Committee monitors the integrity of the financial statements of the Group prepared under IFRS and any formal announcements relating to the Group’s and the Company’s financial performance, reviewing significant financial reporting judgments contained in them, oversees the financial reporting controls and procedures implemented by the Group and monitors and assesses the effectiveness of the Company’s internal financial controls, risk management systems, internal audit function, the inde- pendence and qualifications of the independent auditor and the effectiveness of the external audit process . The Audit Committee is required to meet at appropriate times in the reporting and audit cycle but in practice meets more often as required . Under its terms of reference the Audit Committee is required at least once a year to review its own performance, constitution and terms of reference to ensure it is operating at maximum effectiveness and to recommend any changes it considers necessary for Board approval . The Audit Committee met this obligation through members participating in the main Board review described above . After consider- ation of the review, no changes were proposed to the committee’s terms of refer- ence . The Audit Committee operates a structured framework around the extensive work it does on non-FS matters holding at least two additional meetings annually, at least one of which would be held at the Bank’s head office in Moscow, to consider specific, non-financial statement related areas within its terms of reference . One such meeting was held in 2019 with a further two planned for 2020 . The Audit Committee has developed a risk matrix which constantly evolves to reflect new risks, the perceived impact of, and the Group’s appetite for, any given risk and the measures taken to mitigate those risks . This matrix is run in conjunc- tion with the internal audit function . A new post of chief information security officer was created in late 2017 and filled, with additional personnel expert in cyber-security recruited, in a very competitive market, through 2018 and 2019 to support the Group’s ever-increasing efforts to stay ahead of trends and threats in this sphere . The Group has further broadened its top management team with a new chief investment officer and new chief oper- ating officer appointed in 2019 and now in place . Role of the Remuneration Committee The Remuneration Committee is responsible for determining and reviewing among other things the framework of remuneration of the executive directors, senior management and its overall cost and the Group’s remuneration policies . The ob- jective is to ensure that the executive management of the Group are provided with appropriate incentives to encourage enhanced performance and are in a fair and responsible manner rewarded for their individual contributions to the success of the Group . The Remuneration Committee’s Terms of Reference include reviewing the design and determining targets for any performance related pay schemes and reviewing the design of all share incentive plans for approval by the Board . The Remuneration Committee is required to meet at least twice a year but in practice meets far more often . The Remuneration Committee continued with its work into 2019 on an ongoing review of the operation of the Group’s equity based incentive and retention plan for key, senior and middle management (MLTIP) which launched in 2016 and in considering additional awards to both existing and new par- ticipants for this and subsequent years . The Remuneration Committee recommended 10 members of management be invited to join MLTIP in Q12019, but made no such recom- mendations in Q12020 . The Committee has also been working on plans for an incen- tive and compensation plan to supplement MLTIP for when, in the period 2022 to 2024, existing awards made to MLTIP joiners in 2016-2017 start to go into run off . Under its terms of reference the Remuneration Committee is required at least once a year to review its own performance, constitution and terms of reference to ensure it is operating at maximum effectiveness and to recommend any changes it considers necessary for Board approval . The Remuneration Committee met this obligation through members participat- ing in the main Board review (described above) under which detailed questionnaires were completed by all directors assessing the operation of the Board and both committees as well as individual directors . Although earlier reviews had resulted in certain minor changes to the Remuneration Committee’s terms of reference, no further changes were felt required based on the most recent review . The Committee continues to meet as required . In 2019 it convened 5 times . Appointment, retirement, rotation and removal of directors The directors of the Company are appointed by the general meeting of shareholders with the sanction of an ordinary res- olution . Such an appointment may be made to fill a vacancy or as an additional director . But no director may be appointed un- less nominated by the Board of directors or a committee duly authorized by the Board of directors or by a shareholder or shareholders together holding or representing shares which in aggregate constitute or represent at least 5% in number of votes carried or conferred by the shares giving a right to vote at a general meeting . Notwithstanding that, one or more Directors B (a special cate- gory of director) may be appointed only by Class B sharehold- ers, together holding or representing Class B shares which constitute or represent in aggregate over 50% in nominal capital paid up on the Class B shares upon serving notice to the Company . As at 31 December 2019, Class B shares in aggregate represented under 50% of nominal capital . The Board of directors may at any time appoint any person to the office of director either to fill a vacancy or as an additional director and every such director shall hold office only until the next following annual general meeting and shall not be taken into account in determining the directors who are to retire by rotation . One third of the directors (or if their number is not a multiple of three, the number nearest to three but not exceeding one- third) shall retire by rotation at every annual general meeting . Directors holding an executive office and Directors B are excluded from retirement by rotation . Directors including Directors B may be removed from office by the shareholders at a general meeting with the sanction of an ordinary resolution, subject to giving 28 days’ notice to that director in accordance with the Articles of Associa- tion . Directors B may at any time be removed from office by Class B shareholders together holding or representing Class B shares which constitute or represent over 50% in nominal capital paid up on the Class B Shares upon giving notice to the Company . The office of director shall be vacated if the director: • becomes bankrupt or makes any arrangement or compo- sition with his creditors generally; or • becomes prohibited from being a director by reason of any court order made under Section 180 (disqualifica- tion from holding the position of director on the basis of fraudulent or other conduct) of the Cyprus Companies Law; or • becomes, or may be, of unsound mind; or • resigns his office by notice in writing to the Company left at the registered office; or • is absent from meetings of the board for six consecutive months without permission of the Board of directors and his alternative director (if any) does not attend in his place and the Board of directors resolves that his office be vacated . At any time when Class B Shares cease to exist by virtue of conversion into Class A Shares, each Director B shall thereby become (undesignated) a director and shall remain in office until the next annual general meeting and such director will not be taken into account in determining the directors who are to retire by rotation at such meeting . 52 TCS GROUP HOLDING PLC ANNUAL REPORT 2019 53 CONTINUED CORPORATE GOVERNANCE Share capital As at 31 December 2019, the Company's issued share capital is US$7,972,219 .68 divided in to 199,305, 492 shares, each of nominal value of US$0 .04 per share and fully paid . Of these 119, 291, 268 are Class A Shares and 80, 014, 224 Class B Shares, each with a nominal value of US$0 .04 per share and fully paid . As of 31 December 2019, the Compa- ny’s authorized share capital was USD8,401,385 .92 (with in addition to the stated Class A and Class B shares, 10,729,156 undesignated shares of nominal value US$0 .04 each) . Certain rights of pre-emption are conferred, by the Cyprus Companies Law and the Articles of Association of the Company, on existing shareholders for issue of new shares to the Company in cash . Please refer to the section below on pre-emption rights for further information . All of the Class B shares are held directly or indirectly by Mr Oleg Tinkov, the controlling shareholder . Neither the Company nor any of its subsidiaries has any outstanding convertible securities, exchangeable securities or securities with warrants or any relevant acquisition rights or obligations over the Company's or any of the subsidiaries' authorised but unissued capital or undertakings to increase its issued share capital . Articles of Association In this section Cyprus Companies Law means the Companies Law, Cap . 113 of Cyprus and any successor statute or as the same may from time to time be amended . The Company's current Articles of Association were adopted on 21 October 2013 and, except as to share capital, have not changed since . The following is a brief summary of certain material provisions of the Articles of Association, in force as at 31 December 2018 . Holders of GDRs are not direct shareholders in the Company but instead derive their rights through holding a GDR . A description of the terms and con- ditions of the GDRs can be found at ‘Terms and Conditions of the Global Depositary Receipts’, ‘Summary of the Provisions relating to the GDRs whilst still in Master Form’ and ‘Descrip- tion of Arrangements to Safeguard the Rights of the Holders of the GDRs’ in the Prospectus issued by the Company dated 22 October 2013 and on the website at www .tinkoff .ru/eng . Meeting of shareholders The Company is required to hold an annual general meeting each year on such date and at such place as the directors may determine provided that not more than 15 months should elapse between annual general meetings . The board of directors or any director may convene general meetings . The board of directors will also convene: (a) extraordinary general meetings of the Company on the requisition of: (i) a shareholder or shareholders together, holding or rep- resenting in aggregate, shares (being shares of either of the Class A Shares and Class B Shares) which constitute or represent at least five per cent . of the total number of votes carried or conferred by the Class A Shares and Class B Shares; or Rights of shareholders (ii) a Class B shareholder; Except for the additional voting rights attached to Class B Shares, the right to requisition a general meeting of the shareholders and the right to appoint a Director B, none of the shareholders of the Company has any rights different from any other holder of shares of the Company . A summary of the rights attached to the shares of the Company is set out below . (b) a separate meeting of the Class A shareholders on the requisition of a Class A shareholder or Class A sharehold- ers together, holding or representing Class A Shares which in aggregate constitute or represent at least five per cent . in nominal capital paid up on the Class A Shares; and (c) a separate meeting of the Class B shareholders on the requisition of any Class B shareholder, and any shareholder or shareholders as aforesaid may add items to the agenda of a meeting which they are entitled to attend . An annual general meeting and a meeting called at which a special resolution will be proposed shall be called by at least twenty-one days' prior written notice . All other general meet- ings may be convened by the board by issuing at least 14 days’ prior written notice . General meetings of the Company may be called by shorter notice and shall be deemed to have been duly called if it is so agreed: were sanctioned by the general meeting, provided that a notice of the intention to propose the resolution together with a copy of the resolution, are given to all the sharehold- ers conferring the right to vote on the resolution, at least 30 days prior to the date of the resolution . Such a resolution in writing may consist of several documents in the like form each signed by, or on behalf of, one or more shareholders . • • in the case of a meeting called as the annual general meeting, by all the shareholders entitled to attend and vote; and in the case of any other meeting, by a majority in number of the shareholders having a right to attend and vote at the meeting, being a majority together holding not less than 95 per cent . in nominal value of the shares giving the right to attend and vote at the meeting . Shareholders’ rights at meetings All shareholders are entitled to attend the general meeting or be represented by a proxy authorised in writing . Subject to any rights or restrictions for the time being attached to any class or classes of shares, on a show of hands, every member present (if a natural person) in person or by proxy or, (if a corporation) is present by a representative not himself being a member, shall have one vote for each Class A Share of which he is a holder and shall have 10 votes for each Class B Share of which he is a holder, and on a poll, every member shall have one vote for each Class A Share of which he is a holder and shall have 10 votes for each Class B Share for which he is a holder . The quorum for a general meeting will consist of such number of shareholders holding in aggregate more than 50 per cent . of the issued capital . If within half an hour from the time ap- pointed for the meeting a quorum is not present, the meeting shall stand adjourned to the same day in the following week, at the same time and place or to such other day and at such other time and place as the chairman of the general meeting may determine, and if at the adjourned meeting a quorum is not present within half an hour from the time appointed for the meeting, the shareholders present shall be a quorum . The above quorum does not apply to every separate meeting of the shareholders of any class, in that any shareholder (present in person or by proxy) holding or representing shares of the class which in aggregate constitute or rep- resent at least one-third in nominal capital paid up on the shares of the class, shall constitute a quorum and a meeting . A resolution in writing which has been signed by or on behalf of shareholders conferring in aggregate at least 75 per cent . of the votes exercisable on such resolution at general meet- ing of the Company is valid and effectual as if the resolution Pre-emption rights Under the Cyprus Companies Law, each existing shareholder has a right of pre-emption to subscribe for any new shares to be issued by the Company in cash, in proportion to the aggregate number of such shares of the shareholder . There are no pre-emption rights with respect to shares issued for non-cash consideration . Specifically, all new shares and/or other securities giving rights to purchase shares in the Company, or which are convertible into shares in the Company that are to be issued for cash, shall be offered to the existing shareholders on a pro-rata basis to the participation of each shareholder in the capital of the Company, on a specific date fixed by the directors . Any such offer shall be made upon written notice to all the shareholders specifying the number of the shares and/or other securities giving rights to purchase shares in the Company, or which are convertible into shares in the Company, which the shareholder is entitled to acquire and the time periods (which shall not be less than 14 days date of notification of the offer (or)/from the date of the dispatch of the written notice), within which the offer, if not accepted, shall be deemed to have been rejected . If, until the expiry of the said time period, no notification is received from the person to whom the offer is addressed or to whom the rights have been assigned that such person accepts all or part of the offered shares or other securities giving rights to pur- chase shares in the Company, or which are convertible into shares of the Company, the directors may dispose of them in any manner that they deem fit . These pre-emption rights may be disapplied by a resolu- tion of the general meeting which is passed by a specified majority, being a majority in favour of over one half of all the votes cast if the attendance represents not less than half the issued share capital and a majority in favour of not less than two-thirds of the votes cast in all other cases ("Special Majority Resolution") . In connection with such a waiver, the directors have an obligation to present to the relevant gen- eral meeting a written report which explains the reasons for the proposed disapplication of the pre-emption rights and justifies the proposed issue price of the shares . 54 55 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019CONTINUED CORPORATE GOVERNANCE Voting rights Conversion rights and weighted voting Subject to any special rights or restric- tions as to voting attached to shares, every holder of shares who is present (if a natural person) in person or by proxy or, (if a corporation) is present by a rep- resentative, shall have one vote for each Class A Share of which he is a holder and shall have 10 votes for each Class B Share of which he is a holder . The Class A Shares carry the right to one vote per Class A Share and confer on the Class A shareholders the right: • on a Hands Vote, to one vote per Class A shareholder; and • on a Poll Vote, to one vote per Class A Share held by each Class A share- holder, but no Class A Share carries or confers any right to vote, on a resolution or pro- posed resolution for the removal from office of a Director B . "Director B" means a director appointed or deemed to have been appointed by Class B shareholders in accordance with the Articles of Association . The Class B Shares carry the right to 10 votes per Class B Share and confer on the Class B shareholders the right: • (a) on a Hands Vote, to 10 votes per Class B shareholder; and • (b) on a Poll Vote, to 10 votes per Class B Share held by each Class B shareholder . Every resolution put to the vote of a general meeting shall be decided on a Hands Vote unless a Poll Vote is de- manded in accordance with the Articles of Association . No shareholder shall be entitled to vote (either in person or by proxy) at any general meeting unless all calls or other sums presently owed by him in respect of those shares have been paid or the Board of Directors otherwise determine . Class A Shares are generally not con- vertible into Class B Shares . provided that: Each Class B Share confers on its holder the right to convert each Class B Share into one Class A Share at any time at the absolute discretion of a relevant Class B shareholder by serving a written notice to the Company setting out the number of Class B Shares the relevant holder is willing to convert . The conver- sion referred to above shall take place automatically at the expiration of one Business Day from the date that the rel- evant notice is received by the Company . Once Class B Shares are converted into Class A Shares, the Class A Shares that result from such conversion shall rank pari passu in all respects with the existing Class A Shares in issue . Without prejudice to the rights of the holders of Class B Shares for the conversion of their shares into Class A Shares, Class B Shares shall be auto- matically converted into Class A Shares, on a one-to-one basis, in the following circumstances: (a) in the event that any Class B Share has been transferred to, or is held by, a person other than a Qual- ified Person (defined below) or otherwise who has ceased to be a Qualified Person, and such person (the "Disqualified Holder") does not become or is not re-instated as, a Qualified Person within 45 days of the service on the Disqualified Holder of a notice from the Compa- ny to that effect (the "Conversion Event"), each Class B Share held by the Disqualified Holder shall, with effect of the Conversion Event, automatically be re-classified and re-designated as a “Class A Share" ranking pari passu in all respects and for all purposes with all and each of the pre-existing (outstand- ing) Class A Shares: (i) (ii) (b) If a Class B shareholder has no knowledge that such holder has become a Disqualified Holder and it is unreasonable to expect the Disqualified Holder to have such knowledge, such shareholder shall be deemed not to have become a Disqualified Holder or otherwise ceased to be a Qualified Person, unless or until such shareholder shall be made aware of this by notice in writing from the Company . The Company may at any time require any Class B shareholder to furnish the Company with any information, supported (if the Company so requires) by statutory declaration which the Company may consider necessary for the purpose of determining whether or not such shareholder is a Qualified Person . Notwithstanding Paragraph (a), in the event that the Class B Shares constitute or represent in aggregate less than 10 per cent . in nominal capital paid up only on the Class A Shares and Class B Shares (the "Total Conversion Event"), each existing (issued) Class B Share shall, with effect of the Total Conversion Event, automatically be re-classified and re-designated as a "Class A Share" ranking pari passu in all respects and for all purposes with all and each of the pre-existing (outstanding) Class A Shares . (Qualified Person, for the purpose of these paragraphs means a Class B shareholder or a person connected with such Class B shareholder or a person, or persons jointly, as the trustee or trus- tees of any trust or settlement (whether or not conferring the trustees discre- tionary powers) for the benefit of such Class B shareholder or a relative, or relatives, of such Class B shareholder .) Martin Cocker Jacques Der Megreditchian Independent Non-Executive Director, Chairman of the Audit Committee, Member of the Remuneration Committee . Independent Non-Executive Director, Chairman of the Remuneration Committee, Member of the Audit Committee . Dividend and distribution rights The Class A Shares and Class B Shares have the right to an equal share in any dividend or other distribution paid by the Company, and any dividend or other distribution may only be declared and paid by the Company to the holders of the Class A Shares and Class B Shares together . Variation of rights The special rights carried or conferred by the shares of any class, may, without prejudice to the rights of the shareholders under section 70 of the Cyprus Companies Law, be varied or abrogated with the consent: in writing of the sole (a) shareholder of, or the shareholders holding in ag- gregate at least two thirds in nominal capital value of, the Shares of that class; or (b) of the general meeting of the shareholders of the Shares of that class with the sanction of a majority res- olution, being a resolution sanctioned: (ii) by a majority of not less than two-thirds of the votes cast by the sharehold- ers present in person or by proxy and entitled to vote in all other cases, (i) by a majority of over one-half of the votes cast by the shareholders present in person or by proxy and entitled to vote, in the case where all the shareholders present in person or by proxy and entitled to vote, hold or represent in aggre- gate not less than 50 per cent . in nominal capital val- ue of the entire issued share capital of the Company; or at a general meeting of which not less than 14 days’ notice specifying the intention to propose the resolution as a "majority resolution" has been given . Shareholders voting against the variation of that class who between them hold or represent not less than 15 per cent . of the issued shares of that class may apply to the courts of Cyprus to have the variation set aside . 56 57 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019MANAGEMENT TEAM Oliver Hughes (49) CEO, Chairman of the Management Board of Tinkoff Bank Oliver oversees the strategic direction of Tinkoff Bank . He joined Tinkoff as CEO in 2007 and has been at the helm every step of the way, helping Tinkoff grow into the world’s largest independent digital bank by customer base . Before joining Tinkoff, Oliver worked for Visa International for a decade, including as Head of Visa in Russia from 2005 until 2007 . Prior to Visa, he held various positions including at Reebok, Shell UK and the British Library . Oliver holds a Master of Arts degree in International Politics from Leeds University and a Master’s degree in Information Management and Technology from City University in London . He also has a Bachelor’s (First Class) degree in Russian and French from the University of Sussex . Ilya Pisemsky (44) Chief Financial Officer, Deputy Chairman of the Management Board of Tinkoff Bank Ilya is responsible for financial management, corporate strategy and planning . He has been Chief Financial Officer at Tinkoff since July 2008 and Deputy Chairman of the Management Board since April 2010 . Prior to joining Tinkoff, he was Deputy Chief Financial Officer at Bank Soyuz and held a managerial position at Ernst & Young CIS . Ilya graduated from the Finance Academy under the Government of the Russian Federation in Moscow and holds an MBA from the F .W . Olin Graduate School of Business at Babson College in Wellesley, Massachusetts . Sergei Pirogov (49) Head of Corporate Finance, Member of the Board of Directors of Tinkoff Bank Sergey has been responsible for capital raising and debt portfolio management at Tinkoff as Head of Corporate Finance since January 2010 . Since July 2016, he has served on Tinkoff Bank’s Board of Directors . Previously Sergey worked at Citigroup, where he was Director of Corporate Finance for Russia and the CIS from 2002 to 2008 . Prior to that, he was Programme Coordinator and Head of Investment Projects at IBS Intertraining . Sergey graduated from the Moscow State Institute for International Relations . He also holds an MBA from the Darden Graduate School of Business at the University of Virginia, USA . Artem Yamanov (38) SVP, Business Development Director Artem is in charge of business development at Tinkoff . He has been with the company every step of the way, starting his career as head of products at Tinkoff and growing with the company into his current role of senior vice president . Before joining Tinkoff, he held various positions at Russian Standard Bank and Raiffeisen Bank, including overseeing credit card operations in Russia . Artem holds a Master’s degree in Applied Physics and Mathematics from the Moscow Institute of Physics and Technology . Stanislav Bliznyuk (39) Chief Operating Officer, Deputy Chairman of the Management Board of Tinkoff Bank Stanislav oversees operations at Tinkoff . Before being appointed Chief Operating Officer in June 2012, he was Head of Technologies at the Bank from 2006 . Prior to this, Stanislav worked in the banking sector, including as Process & Project Director at Raiffeisen Bank Russia . Stanislav graduated from Moscow State University with a Master’s degree in Mathematics and Economics . Valeria Pavlyukova (36) Chief Legal Officer, Deputy Chairman of the Management Board of Tinkoff Bank Valeria has overseen all legal matters at Tinkoff as Chief Legal Officer and Deputy Chairman of the Board since January 2017 . Before joining the Bank, she was Head of Legal for Sberbank’s international division and a Legal Director for InBev for/in Russia . Valeria graduated from the International University in Moscow and studied finance at Hult International Business School . Management team positions shown as of 31 December 2019. 58 59 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019CONTINUED MANAGEMENT TEAM George Chesakov (47) Head of Tinkoff Mobile George Chesakov is responsible for Tinkoff’s mobile virtual network operator (MVNO Tinkoff Mobile) and has been in this role since January 2017 . He also served as Chief Operating Officer and Chairman of the Management Board from 2006 until 2011 . Prior to his returning to Tinkoff in February 2016, George was President of OTP Bank and co-founder of Revo Technology . Prior to Tinkoff, George worked at McKinsey & Company, Russian Standard Bank and launched a consumer finance business at Investsberbank (now OTP Bank) . George holds a Master’s degree in Computer Science from Princeton University and a Master’s degree with honors in Mathematics from Moscow State University . Nadezhda Serova (44) Human Resources Director As Head of Tinkoff’s HR department, Nadezhda oversees employee engagement, talent management, development of motivational programs and the overall well- being of employees and all processes related to it . Nadezhda has been working in HR for more than 15 years, including more than 10 years in senior positions . Before joining the Tinkoff team, she was Head of HR for Yandex Market . Nadezhda graduated from Novgorod State University . She also holds a bachelor's degree in business administration from the Russian-Norwegian School . Anatoly Makeshin (47) Head of Payment Systems, Deputy Chairman of the Management Board of Tinkoff Bank Anatoly has been responsible for Tinkoff’s payments systems since 2006 . He has also been a member of Tinkoff’s Management Board since September 2012 . Anatoly graduated from Moscow Power Engineering Institute and holds a PhD in Technical Science from the Russian Academy of State Service . Natalia Izyumova (57) Chief Accountant, Member of the Management Board of Tinkoff Bank Natalia oversees Tinkoff’s accounting . She stepped into her current role and be- came a member of Tinkoff Bank’s Management Board when she joined the Bank in February 2011 . Natalia has also been a member of the Financial Committee of Tink- off Bank since November 2011 . Prior to joining Tinkoff, Natalia held a number of senior-level positions, including that of CFO and Deputy Chairwoman of Dvizheniye Bank’s Management Committee . Natalia graduated from Moscow State University with a degree in Economics and holds a PhD in Economics from the Research Institute of Economy . Evgeny Ivashkevich (49) Viacheslav Tsyganov (44) Risk Director, Deputy Chairman of the Management Board of Tinkoff Bank Chief Information Officer Evgeny is in charge of risk management at Tinkoff . He has been in his current role since 2007, having also joined Tinkoff Bank’s Management Board as Deputy Chairman in 2011 . Before joining Tinkoff, he was a portfolio manager at Renais- sance Capital Bank and Head of Product Development at Russian Standard Bank . Evgeny graduated from the Moscow Institute of Physics and Technology and ob- tained a PhD in Theoretical Physics from the Joint Institute for Nuclear Research . Viacheslav has been with Tinkoff Bank from the beginning of its story . He is in charge of information technology and computer systems at Tinkoff . Viacheslav has been Chief Information Officer since 2009 after transitioning from his role as Head of IT Architecture and Development at the Bank . Viacheslav holds a Master’s degree in Computer Science from Southwest State University . 60 61 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019CONTINUED MANAGEMENT TEAM Darya Ermolina (32) Communications Director As head of communications for Tinkoff, Darya oversees strategic communications and media relations for the Tinkoff group of companies . Before joining the Tinkoff team in January 2014, Darya worked as a senior manager for international media relations for Rosneft Oil Company . Prior to Rosneft Darya worked as a media analyst for PBN Hill+Knowlton Strategies (part of WPP) . Darya graduated from the Moscow State University of International Relations (MGIMO) with a bachelor and a masters degree in international relations . Neri Tollardo (28) Head of International Investor Relations and Partnerships Neri Tollardo joined Tinkoff in 2019 and is responsible for building and developing relationships with international investors and partners . Prior to joining Tinkoff, he was a top-ranked sell-side research analyst at Morgan Stanley for seven years, during which he covered a number of different emerging markets and sectors . Neri holds a MSc in Finance and Private Equity from the London School of Economics and a BSc in International Economics and Management from Bocconi University . Аnna Mikhina (32) Head of Lifestyle Banking As Head of Lifestyle Banking for Tinkoff, Anna oversees strategic development of partner and non-financial services for the Tinkoff group of companies . Prior to joining the Tinkoff team in November 2012, Anna worked as a mobile product manager for Yandex, Rambler and Mail .ru . Anna graduated from the Humanitarian Institute of Television and Radio Broadcasting with a degree in journalism . Larisa Chernysheva (44) Head of Investor Relations and transaction execution Larisa oversees two functions in Tinkoff: she leads the IR strategy which covers all aspects of investor communication and interaction as well as she is responsible for supervising the fixed income and equity related transactions . Before joining the Tinkoff team in August 2012, Larisa worked as a relationship manager for financial institutions for Citigroup Corporate Bank Moscow . Prior to Citigroup Larisa worked as a legal assistant for Freshfields Bruckhaus Deringer Moscow office . Larisa holds masters degree in management and media communications from the Moscow State University of Culture and is certified by the College of Ministry of Foreign Affairs of the Russian Federation in business administration . 62 63 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019Board of Directors and other officers Board of Directors Constantinos Economides, Chairman Alexios Ioannides Mary Trimithiotou Jacques Der Megreditchian Martin Robert Cocker The above all served throughout 2019 and through to the date of these consolidated financial statements . Philippe Delpal retired from the Board on 16 August 2019 . The Company’s Articles of Association include regulations for the retirement by rotation of Directors at each annual general meeting . These regulations will operate in 2020 on the basis of the composition of the Board at the relevant date . Company Secretary Caelion Secretarial Limited 25 Spyrou Araouzou Berengaria 25, 5th floor, 3036, Limassol, Cyprus Registered office 25 Spyrou Araouzou Berengaria 25, 5th floor, 3036, Limassol, Cyprus 31 DECEMBER 2019 TCS Group Holding PLC International Financial Reporting Standards Consolidated Financial Statements and Independent Auditor’s Report Contents Board of Directors and other officers . . . . . . . . . . . . . . . . . . . . F-2 16 Debt Securities in Issue . . . . . . . . . . . . . . . . . . . . . . . . . . . F-78 Consolidated Management Report . . . . . . . . . . . . . . . . . . . . . . F-3 17 Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-79 Independent Auditor’s Report . . . . . . . . . . . . . . . . . . . . . . . . . F-11 18 Insurance Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-79 19 Other Financial and Non-financial Liabilities . . . . . . . . F-80 CONSOLIDATED FINANCIAL STATEMENTS 20 Share Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-83 Consolidated Statement of Financial Position . . . . . . . . . . . F-21 21 Net Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-85 Consolidated Statement of Profit or Loss and Other Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-22 Consolidated Statement of Changes in Equity . . . . . . . . . . F-23 Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . F-24 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-25 2 Operating Environment of the Group . . . . . . . . . . . . . . . F-27 22 Fee and Commission Income and Expense . . . . . . . . . . F-86 23 Customer Acquisition Expense . . . . . . . . . . . . . . . . . . . . . F-87 24 Insurance Premiums Earned and Claims Incurred . . . . F-87 25 Administrative and Other Operating Expenses . . . . . . F-88 26 Other Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . F-89 27 Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-89 28 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-91 29 Reconciliation of Liabilities Arising from Financing 3 Significant Accounting Policies . . . . . . . . . . . . . . . . . . . . F-27 Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-92 4 Critical Accounting Estimates and Judgements in 30 Segment Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-92 Applying Accounting Policies . . . . . . . . . . . . . . . . . . . . . . F-45 31 Financial and Insurance Risk Management . . . . . . . . . . F-99 5 Adoption of New or Revised Standards and Interpretations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-47 32 Management of Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . F-116 33 Contingencies and Commitments . . . . . . . . . . . . . . . . . F-118 6 New Accounting Pronouncements . . . . . . . . . . . . . . . . . . F-48 7 Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . F-49 8 Due from Other Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-50 9 Loans and Advances to Customers . . . . . . . . . . . . . . . . . . F-51 10 Investments in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . F-68 11 Guarantee Deposits with Payment Systems . . . . . . . . . F-75 12 Tangible Fixed Assets, Intangible Assets, and Right-of-use Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-75 13 Other Financial and Non-financial Assets . . . . . . . . . . . F-76 14 Due to Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-77 15 Customer Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-77 34 Offsetting Financial Assets and Financial Liabilities .F-121 35 Transfers of Financial Assets . . . . . . . . . . . . . . . . . . . . . . F-122 36 Non-Controlling Interest . . . . . . . . . . . . . . . . . . . . . . . . . F-123 37 Financial Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-123 38 Fair Value of Financial Instruments . . . . . . . . . . . . . . . . F-124 39 Presentation of Financial Instruments by Measurement Category . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-128 40 Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . F-130 41 Events after the End of the Reporting Period . . . . . . . F-132 1 F-2 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Consolidated Management Report The Board of Directors presents its report together with the audited consolidated financial statements of TCS Group Hold- ing PLC (the “Company”) and its subsidiaries (collectively the “Group”) for the year ended 31 December 2019 . Principal activities and nature of operations of the Group 1 . The Group’s principal activities are all undertaken within the Russian Federation and consist on-line retail banking operations, through its subsidiary JSC “Tinkoff Bank” (the “Bank”), and other operations through its subsidiar- ies, such us insurance operations through JSC “Tinkoff Insurance” (the “Insurance Company”), mobile services through LLC “Tinkoff Mobile” and asset management through LLC “Tinkoff Capital” (Note 1) . 6 . During 2019 the Group completed a secondary public of- fering (“SPO”) of its “class A” shares in the form of Global Depositary Receipts (GDRs) and raised its capital by USD 300 million . This provided the necessary capital to take advantage of the current profitable growth opportunities whilst maintaining sufficient capital buffers in the future (Note 1 and 20) . 7 . During 2019 the Company actively continued the devel- opment its call-center and software development services in Cyprus . 8 . The key offerings of JSC “Tinkoff Insurance” are personal accident insurance, collective insurance against accidents and illnesses, travel insurance, motor vehicle insurance and property insurance, compulsory third party liability insurance (CTP) and voluntary third party liability insur- ance (VTP) (Note 24) . The Insurance Company focuses on online sales . 2 . The Bank specialises in retail banking for individuals, 9 . individual entrepreneurs (“IE”), small and medium enter- prises (“SME”) and brokerage services . The Bank which is fully licensed by the Central Bank of Russia, launched its operations in the Summer of 2007 and is a member of the Russian Deposit Insurance System . The Insurance Company specialises in providing non-life insurance coverage such as accident, property, travel, credit pro- tection and auto insurance . The founder and controlling shareholder of the Company is Oleg Tinkov . Changes in group structure 3 . During 2019 the Group acquired an additional 40% shareholding in LLC “CloudPayments”, a developer of online payment solutions in Russia, and increased its stake to 95% . 4 . During 2019 the Bank founded an asset management company LLC “Tinkoff Capital” to manage investment mutual funds and non-state pension funds . Review of developments, position and performance of the Group’s business 5 . The Bank operates a flexible business model . Its virtual network enables it to quickly and easily increase business or slow down customer acquisition depending on the availability of funding and market conditions . The Bank’s primary customer acquisition channels are Internet and Mobile, but it also uses Direct Sales Agents and part- nerships (co-brands) to acquire new customers . These customer acquisition models, combined with the Bank’s virtual network, afford it a geographic reach across all of Russia’s regions resulting in a highly diversified portfolio . In terms of financial performance the profit of the Group for the year ended 31 December 2019 was RR 36,123 million (2018: RR 27,122 million) . This result is driven by two major continuing trends: the ongoing growth of the Group’s consumer finance business and a growing contribution from the non-credit fees-and-commission business lines . Thus the Group continues to demonstrate an active growth of income from acquiring services . Net margin increased by 44 .6% to RR 86,769 million (2018: increased by 30 .2% to RR 59,992 million) on the back of credit and investment portfolio growth . The growth of the credit portfolio was driven not only by the credit cards loans but also by other types of loans, such as secured, cash and POS loans . The quality of loans continues to improve . The Group aims to diversify its credit portfolio by the extention of collateralised credit products which represents a business line with lower credit risks . The 90 days plus overdue loans ratio (“NPL”) reduced to 9 .1% as at 31 December 2019 (2018: 9 .4%) . The NPL coverage ratio reduced to 156% as at 31 December 2019 (2018: reduced to 164%) . The Investment in debt securities portfolio increased by 35% and amounted to RR 135,178 million (2018: increased by 39 .7% to RR 100,140 million) . This growth has been fuelled by the continued devel- opment of the debit cards and SME business lines . The Group continues to maintain a good quality and diversified securities portfolio . During the year the Bank developed the Tinkoff Investments product by increasing of the customer base and providing of new trading instruments to its clients . The Group’s Insurance business continues to develop at a good pace . This year insurance premiums earned increased by 111 .4% to RR 14,110 million (2018: increase by 144 .0% to RR 6,674 million) . The growth was as a result of a continuous development of auto (including CTP and VTP) and travel insurance, as well as the growth of personal accident insurance along with the credit port- folio and providing a wider coverage of insured risks . Environmental matters 10 . As the Group is an online-only financial institution, the management of the Group believe none of the Group’s business relationships, products or services are likely to have any significant actual or potential significant environmental impacts and do not believe its operations are exposed to any material environmental risks . Man- agement, in reaching this view, have taken into account the risk of adverse impacts that may stem from the Com- pany’s own activities as well as its business relationships including its supply and subcontracting chains . This be- lief is based on continuous scrutiny of the business . The Group is continuously reviewing its processes to identify opportunities to reduce their environmental impact . Human resources 11 . Empowerment is an important ingredient in the success of our organization . To achive this, decision making is delegated to the levels deep below the management team, discussion, idea generation and exchange and transparency is actively promoted and encouraged and an open leadership style ensures that information can move freely . The Group utilizes all types of forums to promote continual dialogue – such as email, online chat rooms, flash meetings, as well as formal- ized meeting structures . The Group offers a clear far-reach- ing career path for its employees, a unique work environment and a fair and transparent compensation . 12 . Clear performance evaluation processes and fair compen- sation are essential . Compensation is a combination of fixed rate salary and supplemental bonuses and is based on employee performance . Employees are evaluated on a regular basis in order to monitor their achievement against their Key Performance Indicators to provide feedback which can be used for their career development and to determine incentive compensation . 13 . Prior to its IPO in 2013, the Group set up share-based management long term incentive plans (‘MLTIP’) as retention and motivational tools for key and senior managers . In March 2016, the Group announced a consolidated long-term management incentive and retention plan, covering around 50 key, senior and middle managers . In 2017, 2018 and 2019 the Group announced the expansion of the plan . The number of participants increased to over 80 . Total target size of the MLTIP pool is 5 .4% of the Group’s share capital as at 31 December 2018 before the SPO (Note 20) . The plan is designed to align more closely managers’ interests with those of shareholders to grow the Group's value . The plan is awarded over four years with each such annual award vesting over the subsequent three years . The Group believes that participation in its share capital is an effective motivation and retention tool . The new management incentive and retention plan now embraces more managers, for two main reasons: firstly, internal promotions as some employees were promot- ed to key managerial positions; and, secondly, as part of its expansion and transformation into a financial marketplace, the Group has hired a significant number of new managers to develop and manage new business lines and to strengthen internal controls, including cyber security . Non-Financial Information and Diversity Statement 14 . The Group’s policies and other information that provide an understanding of the development, performance, po- sition and impact of the Group’s activities in the areas of environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters can be found in the Group’s most recently published Non-Fi- nancial Information and Diversity Statement . The Group will publish its Non-Financial Information and Diversity Statement for the year ended 2019, on the Company’s website, www .tcsgh .com .cy (and www .tinkoff .ru/eng) no later than 30 June 2020 . Principal risks and uncertainties 15 . The Group’s business and financial results are impacted by uncertainties and volatilities in the Russian economic environment . 16 . The Group is subject to a number of principal risks which might adversely impact its performance . The princi- pal activities of the Group are banking and insurance operations and so it is within this area that the principal risks occur . Management considers that those principal risks are financial risks, operational risks and legal risks . Financial risk comprises market risks (including currency risk, interest rate risk and other price risk), credit risk and liquidity risk . 17 . The Board has put in place arrangements to identify, evaluate and manage principal risks and uncertainties faced by the Group . The Group has an established risk management program that focuses on the unpredictabil- ity of financial markets and seeks to minimize potential adverse effects on the Group's financial performance . This is overseen by a dedicated Risk Management func- tion, which works with senior management of the operat- ing companies in Russia as well as the Board of Directors in this area . The primary objectives of the financial risk management function are to establish acceptable risk limits, and then ensure that the exposures remain within these limits . The operational and legal risk management functions are intended to ensure the proper functioning of internal policies and procedures that minimize oper- F-3 F-4 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Consolidated Management Report (Continued) ational and legal risks . The risk management strategy is established so as to identify, assess, monitor and manage the risks arising from Group's activities . These risks as well as other risks and uncertainties, which affect the Group and how these are managed, are presented in Notes 31 and 33 of the consolidated financial state- ments . Contingencies 18 . The Group’s contingencies are disclosed in Note 33 to the consolidated financial statements . Future developments 19 . The Group's strategic objective is to be a full service, online financial and lifestyle ecosystem with a broad range of financial, insurance and quasi-financial products, serving customers through a high-tech online and mobile platform that offers premium quality service and conven- ience, while maintaining high growth rates, profitability and effective data-driven risk management . Results 20 . The Group’s results for the year are set out on page 2 of the consolidated financial statements . Information on distribution of profits is presented in Note 28 . Any important events for the Group that have occurred after the end of the financial year 21 . Important events for the Group that have occurred after the end of the financial year are presented in Note 41 . Share capital Exchange plc . raising aggregate gross proceeds of USD 300 million (RR 18,916 million) which would ensure the necessary capital to seize the current profitable growth opportunities whilst maintaining ample capital buffers in the future . 24 . As at 31 December 2019 the number of issued “class A” shares is 119,291,268 and issued “class B” shares is 80,014,224 (31 December 2018: the number of issued “class A” shares is 96,239,291 and issued “class B” shares is 86,399,534) . Research and development activities 25 . During the year ended 31 December 2019 the Group has undertaken research and development activities related to software including greater use of biometrics, voice assistant, social networking, machine learning and intelligence . Treasury shares 26 . At 31 December 2019 the Group held 4,185,166 (2018: 6,604,353 ) of its own GDRs, equivalent to approximate- ly RR 3,164 million (2018: RR 3,670 million) and which represent 2 .1% (2018: 3 .6%) of the issued share capital . 27 . Treasury shares are GDRs of TCS Group Holding Plc that are held by a special purpose trust which has been specif- ically created for the long-term incentive programme for the MLTIP (see Note 40 for further information) . 28 . The Group repurchased no GDRs in 2019 (2018: 2,094,126 GDRs at market price for RR 2,455 million representing 1 .1% of the issued share capital) . 29 . During 2019 the Group transferred 2,419,187 GDRs (2018: 1,804,894 GDRs), representing 1 .21% (2018: 1 .0%) of the issued share capital, upon vesting under the MLTIP . This resulted in a transfer of RR 506 million (2018: RR 372 million) out of treasury shares to retained earnings . 22 . In June 2019 the Company’s shareholders approved a Board of Directors resolution to increase the authorised share capital to USD 8,401,385 .92 by the creation of 18,263,882 new undesignated ordinary shares of nominal value USD 0 .04 each . At 31 December 2019 the total number of authorised shares is 210,034,648 shares (31 December 2018: 191,770,766 shares) with a par value of USD 0 .04 per share (31 December 2018: USD 0 .04 per share) . 30 . The members of the Board of Directors as of 31 Decem- ber 2019 and at the date of this report are presented above . All served throughout the year ended 2019 and through to the date of these consolidated financial statements, except for Philippe Delpal, who retired from 16 August 2019 . 23 . On 2 July 2019 the Group announced the successful completion of the offering of 16,666,667 GDRs repre- senting interests in its “class A” share on London Stock 31 . There were no significant changes in the assignment of responsibilities and remuneration of the Board of Directors . Branches 32 . The Group did not operate through any branches during the year . Independent auditor 33 . The Independent Auditor, PricewaterhouseCoopers Lim- ited, has expressed their willingness to continue in office . A resolution giving authority to the Board of Directors to fix their remuneration will be proposed at the Annual General Meeting . Going concern 34 . The Directors have access to all information necessary to exercise their duties . The Directors continue to adopt the going concern basis in preparing the consolidated financial statements based on the fact that, after making enquiries and following a review of the Group’s budget for 2020, including cash flows and funding facilities, the Directors consider that the Group has adequate resourc- es to continue in operation for the foreseeable future . Corporate Governance Statement GDRs of TCS Group Holding PLC (a Cyprus incorporated company), with each GDR issued under a deposit agreement dated on or about 24th October 2013 with JPMorganChase Bank N .A . as depositary representing one Class A share, are listed on London Stock Exchange . The Company’s GDRs are also listed on the Moscow Exchange . No shares of TCS Group Holding PLC are listed on any exchange . The Company is required to comply with the UK corporate governance regime to the extent it applies to foreign issuers of GDRs listed on London Stock Exchange . The Company has not adopted corporate governance measures of the same standard in all respects as those adopted by UK incorporat- ed companies or companies with a premium listing on the London Stock Exchange . As the Class A shares themselves are not listed on the Cyprus Stock Exchange (or elsewhere), the Cypriot corporate governance regime, which only relates to companies that are listed on the Cyprus Stock Exchange, does not apply to the Company and accordingly the Company does not monitor its compliance with that regime . The Company’s Home State is Cyprus . A description of the terms and conditions of the GDRs can be found at ‘Terms and Conditions of the Global Depositary Receipts’, ‘Summary of the Provisions relating to the GDRs whilst still in Master Form’ and ‘Description of Arrangements to Safeguard the Rights of the Holders of the GDRs’ in the Prospectus issued by the Company dated 22 October 2013 and on the website at www .tinkoff .ru/eng . Copies of the Articles of Association of the Company adopted on 21 October 2013, the terms of reference of the Committees, and other corporate governance related as well as investor relations related materials can also be found on the website www .tinkoff .ru/eng, at the Company’s main website www .tcsgh .com .cy, on the Company’s page on the London Stock Exchange website (www .londonstockexchange . com/exchange/prices-and-markets/stocks/summary) and at the official site of the Department of Registrar of Companies, Cyprus (http://www .mcit .gov .cy/) . F-5 F-6 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Consolidated Management Report (Continued) Board of Directors Committees of the Board of directors The role of the Board is to provide entrepreneurial leadership to the Group within a framework of prudent and effective controls which enables risk to be assessed and managed . The Board sets the Group’s strategic objectives, ensures that the necessary financial and human resources are in place for the Group to meet its objectives and reviews management’s per- formance . The Board also sets the Group’s values and stand- ards and ensures that its obligations towards the sharehold- ers and other stakeholders are understood and met . The Board operates under a formal schedule of matters reserved to the Board for its decision, approved by share- holders in 2013 . The authorities of the members of the Board are specified by the Articles of Association of the Company and by law . The current five strong Board of directors is comprised of three executive directors including the chairman, and two non-ex- ecutive directors both of whom are independent . Other than the retirement of Mr Philippe Delpal on 16 August 2019, there was no change in the composition of the Board or sta- tus of the directors in 2019 . The Board of directors currently contains no Directors B . The longest serving director Mr Constantinos Economides took over the role of Chairman of the Board of directors in June 2015 . The names of the people who served on the Board during 2019 are listed at Board of Directors and other officers . The Group has established two Committees of the Board . Specific responsibilities have been delegated to those com- mittees as described below . The Board is required to undertake a formal and rigorous review annually of its own performance, that of its commit- tees and of its individual directors . That review was recently carried out, in-house, in relation to 2019, looking at overall performance . All directors completed detailed question- naires on the Board’s, the committees’ and individual director’s performance . Analysis of the resultant feedback will be discussed at a meeting of the Board of Directors on 10 March 2020 and no changes are expected to be made in the performance of the Board, its committees or individual directors . The Board has not appointed a senior independent director . There are only two independent directors of whom at least one will retire each year . The role of appraising the Chairman of the Board for FY2019 was performed by the Chairman of the Audit Committee . The Company has established two Committees of the Board of directors: the Audit Committee and the Remuneration Committee . Their terms of reference are summarized below . Both Committees were formed in October 2013 . The Board reserves the right to amend their terms of reference and arranges a periodic review of each Committee’s role and ac- tivities and considers the appropriateness of additional committees . Committees-current composition The Audit Committee is chaired by an independent non executive director Mr Martin Cocker, and had, until 16 August 2019, two other members both non executive directors, one of whom was independent . From 16 August 2019 the Audit Committee has comprised of its chairman Mr Martin Cocker and one independent non executive director . The Remuneration Committee is also chaired by an independ- ent non-executive director, Mr Jacques Der Megreditchian, and had until 16 August 2019 two other members both non executive directors, one of whom was independent . From 16 August 2019 the Remuneration Committee has comprised of its chairman Mr Jacques Der Megreditchian and one inde- pendent non-executive director . The current terms of reference of both Committees are avail- able to the public and can be found on the Group’s website . A short summary of both is set out below . Role of the Audit Committee The Audit Committee’s primary purpose and responsibil- ity is to assist the Board in its oversight responsibilities . In executing this role the Audit Committee monitors the integrity of the financial statements of the Group prepared under International Financial Reporting Standards (“IFRS”) and any formal announcements relating to the Group’s and the Company’s financial performance, reviewing significant financial reporting judgments contained in them, oversees the financial reporting controls and procedures implemented by the Group and monitors and assesses the effectiveness of the Company’s internal financial controls, risk management systems, internal audit function, the independence and qual- ifications of the independent auditor and the effectiveness of the external audit process . The Audit Committee is required to meet at appropriate times in the reporting and audit cycle but in practice meets more often as required . Under its terms of reference, the Audit Committee is required, at least once each year, to review its own perfor- mance, constitution and terms of reference to ensure it is operating at maximum effectiveness and to recommend any changes it considers necessary for Board approval . The Audit Committee met this obligation through members participating in the main Board review described above . After consideration of the review, no changes were proposed to the committee’s terms of reference . The Audit Committee operates a structured framework around the extensive work it does on non-financial statement matters holding at least two additional meetings annually, at least one of which would be held at the Bank’s head office in Moscow, to consider spe- cific, non-financial statement related areas within its terms of reference . One such meeting was held in 2019 with a further two are planned for 2020 . The Audit Committee has developed a risk matrix which con- stantly evolves to reflect new risks, the perceived impact of, and the Group’s appetite for, any given risk and the measures taken to mitigate those risks . This matrix is run in conjunc- tion with the internal audit function . A new post of chief information security officer was created in late 2017 and filled, with additional personnel expert in cy- ber-security recruited, in a very competitive market, through 2018 and 2019 to support the Group’s ever-increasing efforts to stay ahead of trends and threats in this sphere . The Group has further broadened its top management team with a new chief investment officer and new chief operating officer appointed in 2020 and now in place . Role of the Remuneration Committee The Remuneration Committee is responsible for determining and reviewing among other things the framework of remu- neration of the executive directors, senior management and its overall cost and the Group’s remuneration policies . The objective is to ensure that the executive management of the Group are provided with appropriate incentives to encour- age enhanced performance and are in a fair and responsible manner rewarded for their individual contributions to the success of the Group . The Remuneration Committee’s Terms of Reference include reviewing the design and determining targets for any performance related pay schemes and re- viewing the design of all share incentive plans for approval by the Board . The Remuneration Committee is required to meet at least twice a year but in practice meets far more often . The Remuneration Committee continued with its work into 2019 on an ongoing review of the operation of the Group’s MLTIP which launched in 2016 and in considering additional awards to both existing and new participants for this and subsequent years . The Remuneration Committee recom- mended 10 members of management be invited to join MLTIP in Q1 2019, but made no such recommendations in Q1 2020 . The Committee has also been working on plans for an incen- tive and compensation plan to supplement MLTIP for when, in the period 2022 to 2024, existing awards made to MLTIP joiners in 2016-2017 start to enter into run off . Under its terms of reference the Remuneration Committee is required at least once each year to review its own perfor- mance, constitution and terms of reference to ensure it is operating at maximum effectiveness and to recommend any changes it considers necessary for Board approval . The Remuneration Committee met this obligation through members participating in the main Board review (described above) under which detailed questionnaires were complet- ed by all directors assessing the operation of the Board and both committees as well as individual directors . Although earlier reviews had resulted in certain minor changes to the Remuneration Committee’s terms of reference, no further changes were felt required based on the most recent review . The Committee continues to meet as required . In 2019 it convened 5 times . Appointment, retirement, rotation and removal of directors The directors of the Company are appointed by the general meeting of shareholders with the sanction of an ordinary resolution . Such an appointment may be made to fill a vacancy or as an additional director . But no director may be appointed unless nominated by the Board of directors or a committee duly authorized by the Board of directors or by a shareholder or shareholders together holding or represent- ing shares which in aggregate constitute or represent at least 5% in number of votes carried or conferred by the shares giving a right to vote at a general meeting . Notwithstanding that, one or more Directors B (a special category of director) may be appointed only by Class B shareholders, together holding or representing Class B shares which constitute or represent in aggregate over 50% in nominal capital paid up on the Class B shares upon serving notice to the Company . As at 31 December 2019, Class B shares in aggregate represented under 50% of nominal capital . The Board of directors may at any time appoint any person to the office of director either to fill a vacancy or as an addi- tional director and every such director shall hold office only until the next following annual general meeting and shall not be taken into account in determining the directors who are to retire by rotation . One third of the directors (or if their number is not a multiple of three, the number nearest to three but not exceeding one- F-7 F-8 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Consolidated Management Report (Continued) third) shall retire by rotation at every annual general meeting . Directors holding an executive office and Directors B are exclud- ed from retirement by rotation . Directors including Directors B may be removed from office by the shareholders at a general meeting with the sanction of an ordinary resolution, subject to giving 28 days’ notice to that di- rector in accordance with the Articles of Association . Directors B may at any time be removed from office by Class B share- holders together holding or representing Class B shares which constitute or represent over 50% in nominal capital paid up on the Class B Shares upon giving notice to the Company . The office of director shall be vacated if the director: • becomes bankrupt or makes any arrangement or composi- tion with his creditors generally; or • becomes prohibited from being a director by reason of any court order made under Section 180 (disqualification from holding the position of director on the basis of fraudulent or other conduct) of the Cyprus Companies Law; or • becomes, or may be, of unsound mind; or • resigns his office by notice in writing to the Company left at the registered office; or • is absent from meetings of the board for six consecutive months without permission of the Board of directors and his alternative director (if any) does not attend in his place and the Board of directors resolves that his office be vacated . At any time when Class B Shares cease to exist by virtue of conversion into Class A Shares, each Director B shall thereby become (undesignated) a director and shall remain in office until the next annual general meeting and such director will not be taken into account in determining the directors who are to retire by rotation at such meeting . Significant direct/indirect holdings For the significant direct and indirect shareholdings held in the share capital of the Company, please refer to Note 1 of the consolidated financial statements . Internal control and risk management systems in relation to the financial reporting process Policies, procedures and controls exist around financial reporting . Management is responsible for executing and assessing the effectiveness of these controls . Financial reporting process Diversity policy The Board of Directors is responsible for the preparation of the consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union and the requirements of the Cyprus Companies Law, Cap .113, and for such internal control as the Board of Directors determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error . In preparing the consolidated financial statements, the Board of Directors is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as appli- cable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so . The Board has delegated to the Audit Committee the respon- sibility for reviewing the consolidated financial statements to ensure that they are in compliance with the applicable framework and legislation and for recommending these to the Board for approval . The Audit Committee is responsible for overseeing the Group’s financial reporting process . Internal Controls and Risk Management Management is responsible for setting the principles in relation to risk management . The risk management organ- isation is divided between Policy Making Bodies and Policy Implementation Bodies . Policy Making Bodies are responsi- ble for establishing risk management policies and proce- dures, including the establishment of limits . The main Policy Making Bodies are the Board of Directors, the Management Board, the Finance Committee, the Credit Committee and the Business Development Committee . In addition the Group has implemented an online analytical processing management system based on a common SAS data warehouse that is updated on a daily basis . The set of daily reports includes but is not limited to sales reports, application processing reports, reports on the risk charac- teristics of the card portfolios, vintage reports, transition matrix (roll rates) reports, reports on the pre-, early and late collections activities, reports on compliance with CBR requirements, capital adequacy and liquidity reports, opera- tional liquidity forecast reports and information on intra-day cash flows . The Group is committed to offering equal opportunity to all current and prospective employees, such that no applicant or em- ployee is discriminated in favour of or against on the grounds of sex, racial or ethnic origin, religion or belief, disability, age or sexual orientation in recruitment, training, promotion or any other aspect of employment . Recruitment, training and promotion are exclusively based on merit . All the Group employees involved in the recruitment and management of staff are responsible for ensuring the policy is fairly applied within their areas of responsibility . The Group applies this approach throughout, at all levels . This includes its administrative, management and supervisory bodies, including the Board of Directors of the Company . The composition and diversity information of the Board of Directors of the Group for the year ended and as at 31 December 2019 is set out below: Name Age Male/Female Educational/professional background Constantinos Economides 44 Male Alexios Ioannides Mary Trimithiotou 43 42 Male Female Martin Robert Cocker 60 Male ICAEW, MSc in Management Sciences, experience in ‘Big Four’ professional services firms ICAEW, ICPAC, BSc in Business Administration, experience in ‘Big Four’ professional services firms ICPAC, FCCA, Licensed insolvency practitioner, experience in ‘Big Four’ professional services firms ICAEW, BSc in Mathematics and Economics, experience in ‘Big Four’ professional services firms Philippe Delpal (resigned on 16 August 2019) 46 Male BSc in IT, Telecoms and Economics, senior executive experience in banking industry Jacques Der Megreditchian 60 Male BSc in Business Administration and in Financial Analysis, banking and finance experience Further details of the corporate governance regime of the Company can be found on the website: https://www.tinkoff.ru/eng/investor-relations/corporate-governance/. By Order of the Board Constantinos Economides Chairman of the Board Limassol 10 March 2020 F-9 F-10 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019F-11 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Consolidated Statement of Financial Position Consolidated Statement of Profit or Loss and Other Comprehensive Income Note 31 December 2019 31 December 2018 In millions of RR In millions of RR ASSETS Cash and cash equivalents Mandatory cash balances with the CBRF Due from other banks Loans and advances to customers Financial derivatives Investments in securities Repurchase receivables Guarantee deposits with payment systems Current income tax assets Deferred income tax assets Tangible fixed assets and right-of-use assets Intangible assets Other financial assets Other non-financial assets TOTAL ASSETS LIABILITIES Due to banks Customer accounts Debt securities in issue Financial derivatives Current income tax liabilities Deferred income tax liabilities Subordinated debt Insurance provisions Other financial liabilities Other non-financial liabilities TOTAL LIABILITIES EQUITY Share capital Share premium Treasury shares Share-based payment reserve Retained earnings Revaluation reserve for investments in debt securities Equity attributable to shareholders of the Company Non-controlling interest TOTAL EQUITY TOTAL LIABILITIES AND EQUITY 7 8 9 37 10 11 27 12 12 13 13 14 15 16 37 27 17 18 19 19 20 20 20 20,40 36 57,796 3,448 2,084 329,175 390 135,178 - 8,877 815 1,517 10,560 5,435 21,673 2,510 33,802 2,435 776 198,489 1,710 100,140 1,182 4,603 1,104 - 8,369 4,223 15,642 3,024 579,458 375,499 663 411,614 26,078 590 - 142 18,487 6,280 14,648 4,874 2,708 280,916 9,605 3 51 1,821 20,644 2,859 11,201 3,441 483,376 333,249 230 26,998 (3,164) 1,039 66,880 3,996 95,979 103 96,082 579,458 188 8,623 (3,670) 1,232 36,785 (1,144) 42,014 236 42,250 375,499 Approved for issue and signed on behalf of the Board of Directors on 10 March 2020 . Interest income calculated using the effective interest rate method Other similar income Interest expense calculated using the effective interest rate method Other similar expense Expenses on deposit insurance Net margin Credit loss allowance for loans and advances to customers and credit related commit- ments Credit loss allowance for debt securities at FVOCI Total credit loss allowance for debt financial instruments Net margin after сredit loss allowance Fee and commission income Fee and commission expense Customer acquisition expense Net (losses)/gains from derivatives revaluation Net gains/(losses) from foreign exchange translation Net (losses)/gains from operations with foreign currencies Net gains from disposals of debt securities at FVOCI Net gains/(losses) from debt instruments at FVTPL Insurance premiums earned Insurance claims incurred Administrative and other operating expenses Other operating income Profit before tax Income tax expense Profit for the year Other comprehensive income/(loss) Items that may be reclassified to profit or loss Debt securities at FVOCI and Repurchase receivables: - Net gains/(losses) arising during the period, net of tax - Net gains reclassified to profit or loss upon disposal, net of tax Other comprehensive income/(loss) for the year, net of tax Total comprehensive income for the year Profit is attributable to: - Shareholders of the Company - Non-controlling interest Total comprehensive income is attributable to: - Shareholders of the Company - Non-controlling interest Note 2019 2018 21 21 21 21 21 21 109,972 76,269 118 456 (21,317) (15,559) (134) (1,870) - (1,174) 86,769 59,992 9,19 10 (27,244) (11,607) 139 (192) (27,105) (11,799) 59,664 48,193 36,042 27,423 (17,448) (11,770) (18,177) (14,222) (2,563) 1,784 2,216 (2,155) (968) 301 389 14,110 (4,891) 381 378 (808) 6,674 (2,126) (27,852) (21,499) 4,713 2,971 45,536 35,224 22 22 23 24 24 25 26 27 (9,413) (8,102) 36,123 27,122 5,381 (2,608) (241) (303) 5,140 (2,911) 41,263 24,211 36,122 27,088 1 34 41,262 24,177 1 34 193.62 153.54 190.05 148.78 20 20 Constantinos Economides Mary Trimithiotou Director Director Earnings per share for profit attributable to the Shareholders of the Company, basic (expressed in RR per share) Earnings per share for profit attributable to the Shareholders of the Company, diluted (expressed in RR per share) The notes № 1-41 are an integral part of these Consolidated Financial Statements . The notes № 1-41 are an integral part of these Consolidated Financial Statements . F-21 F-22 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Consolidated Statement of Changes in Equity Attributable to shareholders of the Company t n e m y a p d e s a b - e r a h S e v r e s e r t b e d n i s t n e m t s e v n i r o f e v r e s e r n o i t a u a v e R l s e i t i r u c e s m u i m e r p e r a h S l a t i p a c e r a h S e t o N s e r a h s y r u s a e r T s g n i n r a e d e n i a t e R g n i l - l o r t n o c - n o N t s e r e t n I l a t o T y t i u q e l a t o T In millions of RR Balance at 31 December 2017 188 8,623 1,286 1,436 (1,587) 31,797 41,743 202 41,945 Effect of initial application of IFRS 9 – ECL remeasurement, net of tax Effect of initial application of IFRS 9 – other, net of tax Restated balance at 1 January 2018 - - - - - - 292 39 - - (10,108) (9,816) (39) - - - (9,816) - 188 8,623 1,286 1,767 (1,587) 21,650 31,927 202 32,129 Profit for the year - - - - - 27,088 27,088 34 27,122 Other comprehensive loss: Investments in debt securities at FVOCI and Repurchase receiv- ables Total comprehensive income/ (loss) for the year GDRs buy-back 20 Share-based payment reserve 20,40 Dividends declared 28 - - - - - - - - - - - (2,911) - - (2,911) - (2,911) - (2,911) - 27,088 24,177 34 24,211 - - (2,455) - (2,455) 372 312 630 - - (2,455) 630 - (12,265) (12,265) - (12,265) (54) - - - Balance at 31 December 2018 188 8,623 1,232 (1,144) (3,670) 36,785 42,014 236 42,250 Profit for the year - - - - - 36,122 36,122 1 36,123 Other comprehensive income: Investments in debt securities at FVOCI and Repurchase receiv- ables Total comprehensive income for the year Shares issued Secondary public offering costs Acquisition of non-controlling interest in subsidiaries Share-based payment reserve 20,40 Dividends declared 28 - - - - 20 20 42 18,874 - (499) - - - - - - - - (193) - - - 5,140 - - 5,140 - 5,140 - 5,140 - 36,122 41,262 1 41,263 - - - - - - - - - - 18,916 (499) - - 18,916 (499) (327) (327) (134) (461) 506 156 469 - (5,856) (5,856) - - 469 (5,856) Balance at 31 December 2019 230 26,998 1,039 3,996 (3,164) 66,880 95,979 103 96,082 Consolidated Statement of Cash Flows In millions of RR Cash flows from operating activities Interest income received calculated using the effective interest rate method Other similar income received Interest expense paid calculated using the effective interest rate method Recoveries from written-off loans Expenses on deposits insurance paid Fees and commissions received Fees and commissions paid Customer acquisition expense paid Cash (paid)/received from operations with foreign currencies Cash (paid)/received from operations with derivatives Premiums received from insurance operations Claims paid from insurance operations Other operating income received Administrative and other operating expenses paid Income tax paid Cash flows from operating activities before changes in operating assets and liabilities Changes in operating assets and liabilities Net increase in CBRF mandatory reserves Net (increase)/decrease in due from banks Net increase in loans and advances to customers Net decrease in debt securities measured at FVTPL Net increase in guarantee deposits with payment systems Net increase in other financial assets Net decrease/(increase) in other non-financial assets Net (decrease)/increase in due to banks Net increase in customer accounts Net increase in other financial liabilities Net decrease in non-financial liabilities Net cash from operating activities Cash flows from/(used in) investing activities Acquisition of tangible fixed assets Acquisition of intangible assets Acquisition of investments in securities, repurchase receivables and other investments Proceeds from sale and redemption of investments in securities Net cash used in investing activities Cash flows from/(used in) financing activities Proceeds from secondary public offering Secondary public offering costs paid Proceeds from debt securities in issue Proceeds of perpetual loan participation notes Dividends paid Repayment of principal of lease liabilities Repayment of debt securities in issue Other financing activities cash flows Repayment of subordinated loan Repayment of perpetual loan participation notes GDR’s buy-back Net cash from/(used in) financing activities Effect of exchange rate changes on cash and cash equivalents Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Note 2019 2018 106,975 175 (21,334) 3,420 (1,673) 35,986 (17,492) (19,272) (968) (647) 16,254 (4,337) 4,024 (26,119) (13,606) 73,397 300 (14,693) 4,083 (1,001) 27,143 (11,588) (15,541) 381 2,581 7,044 (2,050) 1,597 (20,927) (5,416) 61,386 45,310 (1,013) (1,308) (151,771) 5,879 (4,848) (4,046) 19 (2,045) 135,633 1,387 (524) 38,749 (760) 1 (78,453) 469 (132) (2,512) (436) 2,113 97,263 177 (141) 62,899 (1,783) (2,539) (108,246) 71,000 (41,568) (2,835) (1,859) (102,204) 74,401 (32,497) 18,916 (499) 23,254 46 (5,601) (1,087) (6,583) (461) - - - 27,985 (1,172) 23,994 33,802 57,796 - - 3,622 - (11,946) - (5,425) - (5,209) (49) (2,455) (21,462) 1,012 9,952 23,850 33,802 9 20 20 29 29 28 29 29 29 29 20 7 7 The notes № 1-41 are an integral part of these Consolidated Financial Statements . The notes № 1-41 are an integral part of these Consolidated Financial Statements . F-23 F-24 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements 1 Introduction These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (“IFRS”) for the year ended 31 December 2019 for TCS Group Holding PLC (the “Company”) and its subsidiaries (together referred to as the “Group”), and in accordance with the requirements of the Cyprus Companies Law, Cap .113 . The Company was incorporated, and is domiciled, in Cyprus in accordance with the provisions of the Companies Law, Cap .113 . The Board of Directors of the Company at the date of authorisation of these consolidated financial statements consists of: Constantinos Economides, Alexios Ioannides, Mary Trimithiotou, Jacques Der Megreditchian and Martin Robert Cocker . The Company Secretary is Caelion Secretarial Limited, 25 Spyrou Araouzou, 25 Berengaria, 5th floor, Limassol 3036, Cyprus . At 31 December 2019 and 2018 the share capital of the Group is comprised of “class A” shares and “class B” shares . A “class A” share is an ordinary share with a nominal value of USD 0 .04 per share and carrying one vote . A “class B” share is an ordinary share with a nominal value of USD 0 .04 per share and carrying 10 votes . As at 31 December 2019 the number of issued “class A” shares is 119,291,268 and issued “class B” shares is 80,014,224 (31 December 2018: the number of issued “class A” shares is 96,239,291 and issued “class B” shares is 86,399,534) . Refer to Note 20 for the information about main changes in number of “class A” and “class B” shares . On 25 October 2013 the Group completed an initial public offering of its “Class A” ordinary shares in the form of global depository receipts (GDRs) listed on the London Stock Exchange plc . On 2 July 2019 the Group completed a secondary public offering (SPO) of its “class A” shares in the form of GDRs . Refer to Note 20 for the information about SPO . On 28 October 2019 the Group’s GDRs started trading also on the Moscow Exchange . As at 31 December 2019 and 2018 the entities and the individuals holding either Class A or Class B shares of the Company were: Class of shares 31 December 2019 31 December 2018 Country of Incorporation Guaranty Nominees Limited (JP Morgan Chase Bank NA) Altoville Holdings Limited Nemorenti Limited Ioanna Georgiou Panagiota Charalambous Maria Vyra Marios Panayides Chloi Panagiotou Leonora Chagianni Total Class A Class B Class B Class A Class A Class A Class A Class A Class A 59 .85% 18 .47% 21 .68% 0 .00% 0 .00% 0 .00% 0 .00% 0 .00% 0 .00% 52 .70% United Kingdom 23 .65% 23 .65% 0 .00% 0 .00% 0 .00% 0 .00% 0 .00% 0 .00% Cyprus Cyprus Cyprus Cyprus Cyprus Cyprus Cyprus Cyprus 100.00% 100.00% Guaranty Nominees Limited is a company holding class A shares of the Company for which global depositary receipts are issued under a deposit agreement made between the Company and JP Morgan Chase Bank NA signed in October 2013 . As at 31 December 2019 and 2018 the beneficial owner of Altoville Holdings Limited and Nemorenti Limited was Russian entrepreneur Mr . Oleg Tinkov . The six individuals listed above each hold one share . The individuals hold them as nominees of Altoville Holdings Limited . As at 31 December 2019 and 2018 the ultimate controlling party of the Company is Mr . Oleg Tinkov . Mr . Oleg Tinkov controls approximately 87 .03% of the aggregated voting rights attaching to the Class A and B shares as at 31 December 2019 (31 December 2018: 89 .98%) excluding voting rights attaching to TCS Group Holding PLC GDRs he holds, if any . The subsidiaries of the Group are set out below . Except where stated the Group owns 100% of shares and has 100% of voting rights of each of these subsidiaries as at 31 December 2019 and 2018 . JSC “Tinkoff Bank” (the “Bank”) provides on-line retail banking services in Russia . The Bank specialises in issuing credit cards and other credit products . JSC “Tinkoff Insurance” (the “Insurance Company”) provides insurance services such as accident, property, travellers’, finan- cial risks and auto insurance . LLC “Microfinance company “Т-Finans” provides micro-finance services . TCS Finance D .A .C . is a structured entity which issued debt securities including subordinated perpetual bonds for the Group . The Group neither owns shares nor has voting rights in this company . However, this entity was consolidated as it was specifi- cally set up for the purposes of the Group, and the Group has exposure to substantially all risks and rewards through outstand- ing guarantees of the entity’s obligations . LLC “TCS” provides printing, distribution and other services to the Group . Goward Group Ltd is an investment holding company which managed part of the Group’s assets . Since February 2018 Goward Group Ltd was in liquidation process, and on 16 April 2019 the company was liquidated . LLC “Phoenix” is a debt collection agency . LLC “Tinkoff Software DC” and LLC “Fintech DC” provide software development services . LLC “Tinkoff Mobile” is a mobile virtual network operator set up in 2017 to provide mobile services . LLC “CloudPayments” is a developer of online payment solutions whose core business is online merchant acquiring in Russia . During 2019 the Group acquired an additional 40% shareholding in LLC “CloudPayments” and increased its stake to 95% . ANO “Tinkoff Education” is a non-commercial organization set up by the Bank as the sole founder . LLC “Tinkoff Capital” is an asset management company established in June 2019 to manage investment funds, mutual funds and non-state pension funds . EBT is a special purpose trust which has been specifically created for the long-term incentive programme for Management of the Group (MLTIP) . The Group neither owns shares nor has voting rights in EBT . Principal activity. The Group’s principal business activities are retail banking to private individuals, individual entrepreneurs’ (“IE”) and small and medium enterprises’ (“SME”) accounts and banking services, brokerage services and insurance operations within the Russian Federation through the Bank and the Insurance Company . The Bank operates under general banking license No . 2673 issued by the Central Bank of the Russian Federation (“CBRF”) on 8 December 2006 . The Insurance Company oper- ates under an insurance license issued by the CBRF . The Bank participates in the state deposit insurance scheme, which was introduced by Federal Law No . 177-FZ “Deposits insurance in banks of the Russian Federation” dated 23 December 2003 . The State Deposit Insurance Agency guarantees re- payment of insurance compensation up to RR 1 .4 million per individual, individual entrepreneur and small enterprise deposits in case of the withdrawal of a license of a bank or a CBRF-imposed moratorium on payments . Registered address and place of business. The Company’s registered address is 25 Spyrou Araouzou, Berengaria 25, 5th floor, Limassol, Cyprus, and place of business is Office 403, Lophitis Business Centre I, Corner of 28th October/Emiliou Chour- mouziou Streets, Limassol 3035 Cyprus . The Bank’s registered address is 1-st Volokolamsky proezd, 10, building 1, 123060, Moscow, Russian Federation . The Insurance Company’s registered address is 2-nd Khutorskaya Street, building 38A, 127287, Moscow, Russian Federation . The Group’s principal place of business is the Russian Federation . Presentation currency. These consolidated financial statements are presented in millions of Russian Rubles (RR) . F-25 F-26 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 2 Operating Environment of the Group Russian Federation. The Russian Federation displays certain characteristics of an emerging market . Its economy is particu- larly sensitive to oil and gas prices . The legal, tax and regulatory frameworks continue to develop and are subject to frequent changes and varying interpretations (Note 33) . In recent years, the Russian economy has been negatively impacted by ongoing political tension in the region and international sanctions against certain Russian companies and individuals . The financial markets continue to be volatile . This operating environment has a significant impact on the Group’s operations and financial position . Management regularly takes necessary measures to maximize the stability of the Group’s operations . However, the future effects of the current economic situation are difficult to predict and management’s current expectations and estimates could differ from actual results . With respect to Rouble interest rates, CBRF “key rate” amounted to 6 .25% per annum as at 31 December 2019 (31 December 2018: 7 .75%) . Since the year end the Russian Rouble has declined by nearly 16% to around USD 1 = RR 72 .02 as at 11 March 2020 includ- ing an approximately 7% decline during the period from 7 March to 11 March 2020 after global oil prices were significantly reduced . The Group actively monitors the situation in the Russian banking sector and the activity of CBRF in response to current and newly developed requirements, or any sanctions against the participants who breach them . In particular in 2019 CBRF introduced certain macroprudential adjustments (for example borrowers’ debt burden limit) to manage macroeconomic risks related to primarily unsecured lending . Management of the Group believes it is highly important to participate in the discus- sion of legislation development in the banking sphere and supports the intention of the CBRF to make the finance market more transparent and disciplined . Late in 2019 news first emerged from China about the COVID-19 (Coronavirus) . At the end of 2019 a limited number of cases of an unknown virus had been reported to the World Health Organisation . In the first few months of 2020 the virus had spread globally and its negative impact has gained momentum . Management considers this outbreak to be a non-adjusting post bal- ance sheet event . While this is still an evolving situation at the time of issuing these consolidated financial statements, to date there has been no discernible impact on the Group’s business, however the future effects cannot be predicted . As the situation is rapidly evolving, we do not consider it is practicable at present to determine a quantitative estimate of the potential impact of this outbreak on the Group . Management will continue to monitor the potential impact and will take steps to mitigate any effects where possible . For the purpose of measurement of expected credit losses (“ECL”) the Group uses supportable forward-looking information, including forecasts of macroeconomic variables . As with any economic forecast, however, the projections and likelihoods of their occurrence are subject to a high degree of inherent uncertainty and therefore the actual outcomes may be significantly different from those projected . Note 31 provides more information of how the Group incorporates forward-looking information in the ECL models . 3 Significant Accounting Policies Basis of preparation. These consolidated financial statements have been prepared in accordance with International Financial Re- porting Standards (“IFRS”) as adopted by the European Union (EU) and the requirements of the Cyprus Companies Law Cap .113 . The consolidated financial statements have been prepared under the historical cost convention, as modified by the initial recognition of financial instruments based on fair value, and by revaluation of financial instruments categorised at fair value through profit or loss (“FVTPL”) and at fair value through other comprehensive income (“FVOCI”) . The principal accounting policies applied in the prepa- ration of these consolidated financial statements are set out below . Apart from the accounting policy changes resulting from the adoption of IFRS 16 effective from 1 January 2019, these policies have been consistently applied to all the periods presented, unless otherwise stated . Refer to Note 5 . Management prepared these consolidated financial statements on a going concern basis . Consolidated financial statements. Subsidiaries are those investees, including structured entities, that the Group controls because the Group (i) has power to direct relevant activities of the investees that significantly affect their returns, (ii) has exposure, or rights, to variable returns from its involvement with the investees, and (iii) has the ability to use its power over the investees to affect the amount of investor’s returns . The existence and effect of substantive rights, including substantive potential voting rights, are considered when assessing whether the Group has power over another entity . For a right to be substantive, the holder must have practical ability to exercise that right when decisions about the direction of the relevant activities of the investee need to be made . The Group may have power over an investee even when it holds less than majority of voting power in an investee . In such a case, the Group assesses the size of its voting rights relative to the size and dispersion of holdings of the other vote holders to determine if it has de-facto power over the investee . Protective rights of other investors, such as those that relate to fundamental changes of investee’s activities or apply only in exceptional circumstances, do not prevent the Group from con- trolling an investee . Subsidiaries are consolidated from the date on which control is transferred to the Group (acquisition date) and are deconsolidated from the date on which control ceases . The acquisition method of accounting is used to account for the acquisition of subsidiaries other than those acquired from parties under common control . Identifiable assets acquired and liabilities and contingent liabilities assumed in a business com- bination are measured at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest . The Group measures non-controlling interest that represents present ownership interest and entitles the holder to a propor- tionate share of net assets in the event of liquidation on a transaction by transaction basis, either at: (a) fair value, or (b) the non-controlling interest’s proportionate share of net assets of the acquiree . Non-controlling interests that are not present ownership interests are measured at fair value . Goodwill is measured by deducting the net assets of the acquiree from the aggregate of the consideration transferred for the acquiree, the amount of non-controlling interest in the acquiree and fair value of an interest in the acquiree held immediately before the acquisition date . Any negative amount (“negative goodwill”) is recognised in profit or loss, after management reas- sesses whether it identified all the assets acquired and all liabilities and contingent liabilities assumed, and reviews appropri- ateness of their measurement . The consideration transferred for the acquiree is measured at the fair value of the assets given up, equity instruments issued and liabilities incurred or assumed, including fair value of assets or liabilities from contingent consideration arrangements, but excludes acquisition related costs such as advisory, legal, valuation and similar professional services . Transaction costs incurred for issuing equity instruments are deducted from equity; transaction costs incurred for issuing debt are deducted from its carrying amount and all other transaction costs associated with the acquisition are expensed . Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated; unre- alised losses are also eliminated unless the cost cannot be recovered . The Company and all of its subsidiaries use uniform accounting policies consistent with the Group’s policies . Non-controlling interest is that part of the net results and of the equity of a subsidiary attributable to interests which are not owned, directly or indirectly, by the Group . Non-controlling interest forms a separate component of the Group’s equity . When the Group acquires a dormant company with no business operations holding an asset and this asset is the main reason of acquisition of the company such transaction is treated as an asset acquisition . No goodwill is recognized as a result of such acquisition . Purchases and sales of non-controlling interests. The Group applies the economic entity model to account for transactions with owners of non-controlling interest . Any difference between the purchase consideration and the carrying amount of non-controlling interest acquired is recorded as a capital transaction directly in equity . The Group recognises the difference between sales consideration and carrying amount of non-controlling interest sold as a capital transaction in the consolidated statement of changes in equity . F-27 F-28 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 3 Significant Accounting Policies (Continued) Associates. Associates are entities over which the Group has significant influence (directly or indirectly), but not control, generally accompanying a shareholding of between 20 and 50 percent of the voting rights . Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost . The carrying amount of associates includes goodwill identified on acquisition less accumulated credit losses, if any . Dividends received from associates reduce the carrying value of the investment in associates . Other post-acquisition changes in Group’s share of net assets of an associate are recognised as follows: (i) the Group’s share of profits or losses of associates is recorded in the consolidated profit or loss for the year as share of result of associates, (ii) the Group’s share of other comprehensive income is recognised in other com- prehensive income and presented separately, (iii); all other changes in the Group’s share of the carrying value of net assets of associates are recognised in profit or loss within the share of result of associates . However, when the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate . Otherwise the Group continue to recognise further losses if it has commitments to fund the associate’s operations . Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred . The Group applies the impairment requirements in IFRS 9 to long-term loans and similar long-term interest that in substance form part of the investment in associate before reducing the carrying value of the investment by a share of a loss of the inves- tee that exceeds the amount of the Group’s interest in the ordinary shares . Disposals of subsidiaries, associates or joint ventures. When the Group ceases to have control or significant influence, any retained interest in the entity is remeasured to its fair value, with the change in carrying amount recognised in profit or loss . The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associ- ate, joint venture or financial asset . In addition, any amounts previously recognised in other comprehensive income in respect of that entity, are accounted for as if the Group had directly disposed of the related assets or liabilities . This may mean that amounts previously recognised in other comprehensive income are recycled to profit or loss . If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income are reclassified to profit or loss, where appropriate . Financial instruments – key measurement terms. Depending on their classification financial instruments are carried at fair value or amortised cost as described below . Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date . The best evidence of fair value is price in an active market . An active market is one in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing infor- mation on an ongoing basis . Fair value of financial instruments traded in an active market is measured as the product of the quoted price for the individual asset or liability and the quantity held by the entity . This is the case even if a market’s normal daily trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a single transaction might affect the quoted price . The price within the bid-ask spread which management considers to be the most representative of fair value for quoted finan- cial assets and liabilities is the last bid price of the business day . A portfolio of financial derivatives or other financial assets and liabilities that are not traded in an active market is measured at the fair value of a group of financial assets and financial liabilities on the basis of the price that would be received to sell a net long position (an asset) for a particular risk exposure or paid to transfer a net short position (a liability) for a particular risk exposure in an orderly transaction between market partici- pants at the measurement date . This is applicable for assets carried at fair value on a recurring basis if the Group: (a) manages the group of financial assets and financial liabilities on the basis of the entity’s net exposure to a particular market risk (or risks) or to the credit risk of a particular counterparty in accordance with the entity’s documented risk management or investment strategy; (b) it provides information on that basis about the group of assets and liabilities to the entity’s key management personnel; and (c) the mar- ket risks, including duration of the entity’s exposure to a particular market risk (or risks) arising from the financial assets and financial liabilities is substantially the same . Valuation techniques such as discounted cash flow models or models based on recent arm’s length transactions or considera- tion of financial data of the investees, are used to measure fair value of certain financial instruments for which external market pricing information is not available . Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) level one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities, (ii) level two measurements are valuations techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and (iii) level three measurements are valuations not based on solely observable market data (that is, the meas- urement requires significant unobservable inputs) . Transfers between levels of the fair value hierarchy are deemed to have occurred at the end of the reporting period . Refer to Note 38 . Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instru- ment . An incremental cost is one that would not have been incurred if the transaction had not taken place . Transaction costs include fees and commissions paid to agents (including employees acting as selling agents), advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties . Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs . Amortised cost (“AC”) is the amount at which the financial instrument was recognised at initial recognition less any principal repayments, plus accrued interest, and for financial assets less any allowance for expected credit losses . Accrued interest includes amortisation of transaction costs deferred at initial recognition and of any premium or discount to maturity amount using the effective interest method . Accrued interest income and accrued interest expense, including both accrued coupon and amortised discount or premium (including fees deferred at origination, if any), are not presented separately and are included in the carrying values of related items in the consolidated statement of financial position . The effective interest method is a method of allocating interest income or interest expense over the relevant period, so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount . The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future credit losses) through the expected life of the financial instrument or a shorter period, if appropriate, to the gross carrying amount of a financial asset or to the amortised cost of a financial liability . The calculation does not consider expected credit losses and includes transaction costs, premiums or discounts and fees and points paid or secured that are integral to the effective interest rate such as origination fees . The effective interest rate discounts cash flows of variable interest instruments to the next interest repricing date, except for the premium or discount, which reflects the credit spread over the floating rate specified in the instrument, or other variables that are not reset to market rates . Such premiums or discounts are amortised over the whole expected life of the instrument . The present value calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate . For assets that are purchased or originated credit impaired (“POCI”) at initial recognition, the effective interest rate is adjusted for credit risk, i .e . it is calculated based on the expected cash flows on initial recognition instead of contractual payments . Financial instruments – initial recognition. Financial instruments at FVTPL are initially recorded at fair value . All other finan- cial instruments are initially recorded at fair value adjusted for transaction costs that are incremental and directly attributable to the acquisition or the issue of the financial asset or financial liability . Fair value at initial recognition is best evidenced by the transaction price . A gain or loss on initial recognition is only recorded if there is a difference between fair value and transac- tion price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets . F-29 F-30 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 3 Significant Accounting Policies (Continued) After the initial recognition, an ECL allowance is recognised for financial assets measured at AC and investments in debt instru- ments measured at FVOCI, resulting in an immediate accounting loss . All purchases and sales of financial assets that require delivery within the time frame established by regulation or market convention (“regular way” purchases and sales) are recorded at trade date, which is the date on which the Group commits to deliver a financial asset . The Group uses discounted cash flow valuation techniques to determine the fair value of currency swaps, foreign exchange forwards that are not traded in an active market . Differences may arise between the fair value at initial recognition, which is considered to be the transaction price, and the amount determined at initial recognition using a valuation technique . The differences are immediately recognised in profit or loss if the valuation uses only level 1 or level 2 inputs . Financial assets – classification and subsequent measurement – measurement categories. The Group classifies financial assets in the following measurement categories: FVTPL, FVOCI and AC . The classification and subsequent measurement of debt financial assets depends on: Where the contractual terms introduce exposure to risk or volatility that is inconsistent with a basic lending arrangement, the financial asset is classified and measured at FVTPL . The SPPI assessment is performed on initial recognition of an asset and it is not subsequently reassessed . However, if the contractual terms of the asset are modified, the Group considers if the contractual cash flows continue to be consistent with a basic lending arrangement in assessing whether the modification is substantial . See below for “Financial assets – modification” . Financial assets – reclassification. Financial instruments are reclassified only when the business model for managing the portfolio as a whole changes . The reclassification has a prospective effect and takes place from the beginning of the first reporting period that follows after the change in the business model . The Group did not change its business model during the current and comparative period and did not make any reclassifications . Financial assets – impairment – credit loss allowance for ECL. The Group assesses on a forward-looking basis the ECL for debt instruments (including loans) measured at AC and FVOCI and for the exposure arising from loan commitments and finan- cial guarantee contracts . The Group measures ECL and recognises credit loss allowance at each reporting date . The measurement of ECL reflects: 1) an unbiased and probability weighted amount that is determined by evaluating a range of possible outcomes; • the Group’s business model for managing the related assets portfolio and 2) the time value of money; and • the cash flow characteristics of the asset . Financial assets – classification and subsequent measurement – business model. The business model reflects how the Group manages the assets in order to generate cash flows – whether the Group’s objective is: • solely to collect the contractual cash flows from the assets (“hold to collect contractual cash flows”); or • to collect both the contractual cash flows and the cash flows arising from the sale of assets (“hold to collect contractual cash flows and sell”); • if neither of i) and ii) is applicable, the financial assets are classified as part of “other” business model and measured at FVTPL . Business model is determined for a group of assets (on a portfolio level) based on all relevant evidence about the activities that the Group undertakes to achieve the objective set out for the portfolio available at the date of the assessment . Factors considered by the Group in determining the business model include the purpose and composition of a portfolio, past experi- ence on how the cash flows for the respective assets were collected, how risks are assessed and managed, how the assets’ performance is assessed and how managers are compensated . Based on the analysis performed the Group included the following financial instruments in the business model “hold to collect contractual cash flows” since the Group manages these financial instruments solely to collect contractual cash flows: cash and cash equivalents, mandatory cash balances with the CBRF, due from other banks, loans and advances to customers, guarantee deposits with payment systems and other financial assets . The Group included debt securities at FVOCI in the business model “hold to collect contractual cash flows and sell” since the Group manages these financial instruments to collect both the con- tractual cash flows and the cash flows arising from the sale of assets . The Group included debt securities measured at FVTPL and financial derivatives in the business model “other” . Financial assets – classification and subsequent measurement – cash flow characteristics. Where the business model is to hold assets to collect contractual cash flows or to hold contractual cash flows and sell, the Group assesses whether the cash flows represent solely payments of principal and interest (the SPPI test) . Financial assets with embedded derivatives are con- sidered in their entirety when determining whether their cash flows are consistent with the SPPI feature . In making this assessment, the Group considers whether the contractual cash flows are consistent with a basic lending arrangement, i .e . interest includes only consideration for credit risk, time value of money, other basic lending risks and profit margin . 3) all reasonable and supportable information that is available without undue cost and effort at the end of each reporting period about past events, current conditions and forecasts of future conditions . Debt instruments measured at AC are presented in the consolidated statement of financial position net of the allowance for ECL . For loan commitments (where those components can be separated from the loan) and financial guarantees, a separate pro- vision for ECL is recognised as a financial liability in the consolidated statement of financial position . For debt instruments at FVOCI, changes in amortised cost, net of allowance for ECL, are recognised in profit or loss and other changes in carrying value are recognised in OCI as gains less losses on debt instruments at FVOCI . The Group applies a “three stage” model for impairment in accordance with IFRS 9, based on changes in credit quality since initial recognition: 1) A financial instrument that is not credit-impaired on initial recognition is classified in Stage 1 . Financial assets in Stage 1 have their ECL measured at an amount equal to the portion of lifetime ECL that results from default events possible within the next 12 months or until contractual maturity, if shorter (“12 months ECL”) . 2) If the Group identifies a significant increase in credit risk (“SICR”) since initial recognition, the asset is transferred to Stage 2 and its ECL is measured based on ECL on a lifetime basis, that is, up until contractual maturity but considering expect- ed prepayments, if any (“lifetime ECL”) . Refer to Note 31 for a description of how the Group determines when a SICR has occurred . 3) If the Group determines that a financial asset is credit-impaired, the asset is transferred to Stage 3 and its ECL is measured as a lifetime ECL . Refer to Note 31 for a description of how the Group defines credit-impaired assets and default . For financial assets that are purchased or originated credit-impaired (“POCI Assets”), the ECL is always measured at a lifetime ECL . Note 31 provides information about inputs, assumptions and estimation techniques used in measuring ECL, including an explanation of how the Group incorporates forward-looking information in the ECL models . As an exception, for certain financial instruments, such as credit cards, that may include both a loan and an undrawn commit- ment component, the Group measures expected credit losses over the period that the Group is exposed to credit risk, that is, until the expected credit losses would be mitigated by credit risk management actions, even if that period extends beyond the maximum contractual period . This is because contractual ability to demand repayment and cancel the undrawn commitment does not limit the exposure to credit losses to such contractual notice period . Refer to Note 4 for critical judgements applied by the Group in determining the period for measuring ECL . F-31 F-32 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 3 Significant Accounting Policies (Continued) Financial assets – write-off. Uncollectible assets are partly written-off against the related сredit loss allowance usually after one year since they become overdue . The amount of uncollectible part of loan is estimated on a loan portfolio basis taking into account defaulted loans recovery statistics . The Group writes-off financial assets that are mostly still subject to enforcement activity, however, there is no reasonable expectation of recovery . If credit-impaired loans are sold to third parties, the Group remeasures the amount of ECL prior to sale taking into consideration the expected sales proceeds so that there are no gains or losses on derecognition upon sale . Repayments of written-off loans. Recovery of amounts previously written-off as uncollectible is credited directly to the credit loss allowance line in the consolidated statement of profit or loss and other comprehensive income . Cash flows related to repayments of written-off loans are separately presented within recoveries from written-off loan in the consolidated statement of cash flows . Financial assets – derecognition. The Group derecognises financial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expired or (b) the Group has transferred the rights to the cash flows from the financial assets or entered into a qualifying pass-through arrangement while (i) also transferring substantially all risks and rewards of ownership of the assets or (ii) neither transferring nor retaining substantially all risks and rewards of ownership, but not retaining control . Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose restrictions on the sale . Financial assets – modification. The Group sometimes renegotiates or otherwise modifies the contractual terms of the finan- cial assets . The Group assesses whether the modification of contractual cash flows is substantial considering, among other, the following factors: any new contractual terms that substantially affect the risk profile of the asset, significant change in interest rate, change in the currency denomination, new collateral or credit enhancement that significantly affects the credit risk asso- ciated with the asset, or a significant extension of a loan when the borrower is not in financial difficulties . If the modified terms are substantially different, the rights to cash flows from the original asset expire and the Group derec- ognises the original financial asset and recognises a new asset at its fair value . The date of renegotiation is considered to be the date of initial recognition for subsequent impairment calculation purposes, including determining whether a SICR has occurred . The Group also assesses whether the new loan or debt instrument meets the SPPI criterion . Any difference between the carry- ing amount of the original asset derecognised and fair value of the new substantially modified asset is recognised in profit or loss, unless the substance of the difference is attributed to a capital transaction with owners . In a situation where the renegotiation was driven by financial difficulties of the counterparty and inability to make the originally agreed payments, the Group compares the original and revised expected cash flows to assets whether the risks and rewards of the asset are substantially different as a result of the contractual modification . If the risks and rewards do not change, the mod- ified asset is not substantially different from the original asset and the modification does not result in derecognition . The Group recalculates the gross carrying amount by discounting the modified contractual cash flows by the original effective interest rate (or credit-adjusted effective interest rate for POCI financial assets) and recognises a modification gain or loss in profit or loss . Usually modifications of stage 3 loans do not result in derecognition since they do not change the expected cash flows substantially and represent the way of collection of past due balances . If the terms of the modified asset are not substantially different, the modification does not result in derecognition . Financial liabilities – measurement categories. Financial liabilities are classified as subsequently measured at AC, except for financial liabilities at FVTPL: this classification is applied to derivatives, financial liabilities held for trading (e .g . short positions in securities) . Financial liabilities – derecognition. Financial liabilities are derecognised when they are extinguished (i .e . when the obligation specified in the contract is discharged, cancelled or expires) . An exchange between the Group and its original lenders of debt instruments with substantially different terms, as well as sub- stantial modifications of the terms and conditions of existing financial liabilities, are accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability . The terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10% different from the discounted present value of the remaining cash flows of the original financial liability . In addition, other qualitative factors, such as the currency that the instrument is denominated in, changes in the type of inter- est rate, new conversion features attached to the instrument and change in loan covenants are also considered . If an exchange of debt instruments or modification of terms is accounted for as an extinguishment, any costs or fees incurred are recognised as part of the gain or loss on the extinguishment . If the exchange or modification is not accounted for as an extinguishment, any costs or fees incurred adjust the carrying amount of the liability and are amortised over the remaining term of the modi- fied liability . Modifications of liabilities that do not result in extinguishment are accounted for as a change in estimate using a cumulative catch up method, with any gain or loss recognised in profit or loss, unless the economic substance of the difference in carrying values is attributed to a capital transaction with owners . Cash and cash equivalents. Cash and cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value . Cash and cash equivalents include all interbank placements and reverse sale and repurchase agreements with other banks with original maturities of less than three months . Funds restricted for a period of more than three months on origination are excluded from cash and cash equivalents . Cash and cash equivalents are carried at amortised cost as: (i) they are held for collection of contractual cash flows and those cash flows represent SPPI, and (ii) they are not designated at FVTPL . The payments or receipts presented in the consolidated statement of cash flows represent transfers of cash and cash equiv- alents by the Group, including amounts charged or credited to current accounts of the Group’s counterparties held with the Group, such as loan interest income or principal collected by charging the customer’s current account or interest payments or disbursement of loans credited to the customer’s current account, which represents cash or cash equivalent from the custom- er’s perspective . Mandatory cash balances with the CBRF. Mandatory cash balances with the CBRF are carried at amortised cost and represent non-interest bearing mandatory reserve deposits which are not available to finance the Group’s day to day operations and hence are not considered as part of cash and cash equivalents for the purposes of the consolidated statement of cash flows . Due from other banks . Amounts due from other banks are recorded when the Group advances money to counterparty banks with no intention of trading the resulting unquoted non-derivative receivable due on fixed or determinable dates . Amounts due from other banks are carried at amortised cost as: (i) they are held for collection of contractual cash flows and those cash flows represent SPPI, and (ii) they are not designated at FVTPL . Certain bank deposits are subject to the “bail-in” legislation that permits or requires a national resolving authority to impose losses on holders in particular circumstances . Where the bail-in clauses are included in the contractual terms of the instru- ment and would apply even if legislation subsequently changes, the SPPI test is not met and such instruments are mandatorily measured at FVTPL . The Group did not identify such balances due from other banks . Where such clauses in the contract merely acknowledge the existence of the legislation and do not create any additional rights or obligation for the Group, the SPPI crite- rion is met and the respective instruments are carried at AC . Investments in debt securities. Based on the business model and the contractual cash flow characteristics, the Group classi- fies investments in debt securities as carried at AC, FVOCI or FVTPL . Debt securities are carried at AC if they are held for collection of contractual cash flows and where those cash flows represent SPPI, and if they are not voluntarily designated at FVTPL in order to significantly reduce an accounting mismatch . F-33 F-34 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 3 Significant Accounting Policies (Continued) Debt securities are carried at FVOCI if they are held for collection of contractual cash flows and for selling, where those cash flows represent SPPI, and if they are not designated at FVTPL . Interest income from these assets is calculated using the effec- tive interest method and recognised in profit or loss . An impairment allowance estimated using the expected credit loss model is recognised in profit or loss for the year . All other changes in the carrying value are recognised in OCI except for foreign exchange translation gains/(losses) and interest income calculated using the effective interest rate method . When the debt security is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from OCI to profit or loss . Investments in debt securities are carried at FVTPL if they do not meet the criteria for AC or FVOCI . The Group may also irrev- ocably designate investments in debt securities at FVTPL on initial recognition if applying this option significantly reduces an accounting mismatch between financial assets and liabilities being recognised or measured on different accounting bases . Loans and advances to customers. Loans and advances to customers are recorded when the Group advances money to pur- chase or originate a loan due from a customer . Based on the business model and the cash flow characteristics, the Group classifies loans and advances to customers into one of the following measurement categories: 1) AC: loans that are held for collection of contractual cash flows and those cash flows represent SPPI and loans that are not voluntarily designated at FVTPL; 2) FVTPL: loans that do not meet the criteria for AC or FVOCI are measured at FVTPL (mandatory FVTPL) . Impairment allowances of the loans measured at AC are determined based on the forward-looking ECL model . Note 31 pro- vides information about inputs, assumptions and estimation techniques used in measuring ECL, including an explanation of how the Group incorporates forward-looking information in the ECL models . Credit related commitments. The Group issues commitments to provide loans . Commitments to provide loans are initially recognised at their fair value, which is normally evidenced by the amount of fees received . Such loan commitment fees are deferred and included in the carrying value of the loan on initial recognition . At the end of each reporting period, the commit- ments are measured at the amount of the loss allowance determined based on the expected credit loss model . For loan com- mitments (where those components can be separated from the loan), a separate provision for ECL is recognised as a liability in the consolidated statement of financial position . Sale and repurchase agreements and lending of securities. Sale and repurchase agreements (“repo agreements”), which effectively provide a lender’s return to the counterparty, are treated as secured financing transactions . Securities sold under such sale and repurchase agreements are not derecognised . The securities are not reclassified in the consolidated statement of financial position unless the transferee has the right by contract or custom to sell or repledge the securities, in which case they are reclassified as repurchase receivables . The corresponding liability is presented within amounts due to other banks or other borrowed funds . Securities purchased under agreements to resell (“reverse repo agreements”), which effectively provide a lender’s return to the Group, are recorded as due from other banks or loans and advances to customers, as appropriate . The difference between the sale and repurchase price, adjusted by interest and dividend income collected by the counterparty, is treated as interest income and accrued over the life of reverse repo agreements using the effective interest method . Securities lent to counterparties for a fixed fee are retained in the consolidated financial statements in their original catego- ry in the consolidated statement of financial position unless the counterparty has the right by contract or custom to sell or repledge the securities, in which case they are reclassified and presented separately . Securities borrowed for a fixed fee are not recorded in the consolidated financial statements, unless these are sold to third par- ties, in which case the purchase and sale are recorded in profit or loss for the year within gains less losses arising from trading securities . The obligation to return the securities is recorded at fair value in other borrowed funds . Based on classification of securities sold under the sale and repurchase agreements, the Group classifies repurchase receiva- bles into one of the following measurement categories: AC, FVOCI, FVTPL . Guarantee deposits with payment systems. Amounts of guarantee deposits with payment systems are recorded when the Group advances money to payment systems with no intention of trading the resulting unquoted non-derivative receivable . Amounts of guarantee deposits with payment systems are carried at amortised cost . Tangible fixed assets. Tangible fixed assets are stated at cost less accumulated depreciation and provision for impairment, where required . Costs of minor repairs and day-to-day maintenance are expensed when incurred . Costs of replacing major parts or compo- nents of premises and equipment items are capitalised, and the replaced part is retired . At the end of each reporting period management assesses whether there is any indication of impairment of tangible fixed assets . If any such indication exists, management estimates the recoverable amount, which is determined as the higher of an asset’s fair value less costs to sell and its value in use . The carrying amount is reduced to the recoverable amount and the im- pairment loss is recognised in profit or loss for the year . An impairment loss recognised for an asset in prior years is reversed if there has been a change in the estimates used to determine the asset’s value in use or fair value less costs to sell . Gains and losses on disposals determined by comparing proceeds with carrying amount are recognised in profit or loss for the year (within other operating income or expenses) . Depreciation. Depreciation of each item of tangible fixed assets is calculated using the straight-line method to allocate its cost to its residual value over its estimated useful life as follows: Building Equipment Vehicles Useful lives in years 99 3 to 10 5 Leasehold improvements Shorter of their useful economic life and the term of the underlying lease The residual value of an asset is an estimated amount that the Group would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset was already of the age and in the condition expected at the end of its useful life . The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period . Intangible assets. The Group’s intangible assets other than insurance license have definite useful life and include capitalised acquired computer software and internally developed software . Development costs that are directly associated with identi- fiable and unique software controlled by the Group are recorded as intangible assets if the inflow of incremental economic benefits exceeding costs is probable . Capitalised costs include staff costs of the software development team and an appropri- ate portion of relevant overheads . Computer software licenses acquired are capitalised on the basis of the costs incurred to acquire and bring to use the specific software . All other costs associated with computer software, e .g . its maintenance, are expensed when incurred . Capitalised computer software is amortised on a straight line basis over expected useful lives of 1 to 10 years . At each reporting date management assesses whether there is any indication of impairment of intangible assets with an indefi- nite useful life . If any such indication exists, management estimates the recoverable amount, which is determined as the higher of an asset’s fair value less costs to sell and its value in use . The carrying amount is reduced to the recoverable amount and the impairment loss is recognised in profit or loss . An impair- ment loss recognised for an asset in prior years is reversed if there has been a change in the estimates used to determine the asset’s value in use or fair value less costs to sell . Intangible assets including goodwill with indefinite useful life are tested annually for impairment . F-35 F-36 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 3 Significant Accounting Policies (Continued) Accounting for leases by the Group as a lessee from 1 January 2019. From 1 January 2019, leases, where the Group is the lessee, are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group . Each lease payment is allocated between the liability and finance cost . The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period . The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis . Assets and liabilities arising from a lease are initially measured on a present value basis . Lease liabilities include the net pres- ent value of the following lease payments: • fixed payments (including in-substance fixed payments), less any lease incentives receivable under cancellable and non-can- cellable operating leases; • variable lease payments that are based on an index or a rate and that are initially measured using the index or rate as at the commencement date; • amounts expected to be payable by the lessee under residual value guarantees; • the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and • payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option . The lease term includes any non-cancellable and optional extension periods which have been assessed as reasonably certain to be exercised . The lease payments are discounted using the interest rate implicit in the lease . If that rate cannot be deter- mined, the lessee’s incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions . Right-of-use assets are measured at cost comprising the following: • the amount of the initial measurement of lease liability, • any lease payments made at or before the commencement date less any lease incentives received, • any initial direct costs, and • dismantling and restoration costs . As an exception to the above, the Group accounts for short-term leases and leases of low value assets by recognising the lease payments as an operating expense on a straight line basis . Short-term leases are leases with a lease term of 12 months or less, and the lease does not provide for the possibility of repurchase of the asset at the end of the contract . Low value assets are assets with a value of RR 300,000 or less at the date of conclusion of the contract . Right-of-use assets are included in tangible fixed assets, lease liabilities are included in other non-financial liabilities in the consolidated statement of financial position . Depreciation of right-of-use assets are recognised in administrative and other op- erating expenses in the consolidated statement of profit or loss and other comprehensive income . Finance cost is recognised within other similar expense line of the consolidated statement of profit or loss and other comprehensive income . Repayment of principal of lease liabilities is disclosed within cash flows from financing activities of the consolidated statement of cash flows . Accounting for operating leases by the Group as a lessee prior to 1 January 2019. Where the Group is a lessee in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the lessor to the Group, the total lease payments are charged to profit or loss for the year (rental expense within administrative and other operating expenses) on a straight-line basis over the period of the lease . Leases embedded in other agreements are separated if (a) fulfilment of the arrangement is dependent on the use of a specific asset or assets and (b) the arrangement conveys a right to use the asset . When assets are leased out under an operating lease, the lease payments receivable are recognised as rental income on a straight-line basis over the lease term . Due to other banks. Amounts due to banks are recorded when money or other assets are advanced to the Group by counter- party banks . Non-derivative liability is carried at amortised cost . Customer accounts. Customer accounts are non-derivative liabilities to corporate entities and individuals and are carried at amortised cost . Debt securities in issue. Debt securities are stated at amortised cost . If the Group purchases its own debt securities in issue, they are removed from the consolidated statement of financial position and the difference between the carrying amount of the liability and the consideration paid is included in a separate line of consolidated statement of profit or loss and other compre- hensive income as gains/losses from repurchase of debt securities in issue . Subordinated debt. Subordinated debt can only be paid in the event of a liquidation after the claims of other higher priority creditors have been met . Subordinated debt is carried at AC . Financial derivatives. Financial derivatives represented by forwards and foreign currency swaps are carried at their fair value . Derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative . Changes in the fair val- ue of financial derivatives are recorded in profit or loss within Net (losses)/gains from derivatives revaluation . The Group does not apply hedge accounting . Income taxes. Income taxes have been provided for in the consolidated financial statements in accordance with Russian legislation and Cyprus legislation enacted or substantively enacted by the end of the reporting period . The income tax charge comprises current tax and deferred tax and is recognised in profit or loss for the year except if it is recognised in other com- prehensive income or directly in equity because it relates to transactions that are also recognised, in the same or a different period, in other comprehensive income or directly in equity . Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect of taxable profits or losses for the current and prior periods . Taxable profits or losses are based on estimates if the consolidated financial state- ments are authorised prior to filing relevant tax returns . Taxes other than on income are recorded within administrative and other operating expenses . Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes . In accord- ance with the initial recognition exemption, deferred taxes are not recorded for temporary differences on initial recognition of an asset or a liability in a transaction other than a business combination if the transaction, when initially recorded, affects neither accounting nor taxable profit . Deferred tax balances are measured at tax rates enacted or substantively enacted at the end of reporting period which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilised . Deferred tax assets and liabilities are netted only within the individual companies of the Group . Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised . Deferred income tax is not recognised on post-acquisition retained earnings and other post acquisition movements in reserves of subsidiaries, where the Group controls the subsidiary’s dividend policy and it is probable that the difference will not reverse through dividends or otherwise in the foreseeable future . Uncertain tax positions. The Group's uncertain tax positions are assessed by management at the end of each reporting period . Liabilities are recorded for income tax positions that are determined by management as more likely than not to result in additional taxes being levied if the positions were to be challenged by the tax authorities . The assessment is based on the interpretation of tax laws that have been enacted or substantively enacted at the end of reporting period and any known court or other rulings on such issues . Liabilities for penalties, interest and taxes other than on income are recognised based on management’s best estimate of the expenditure required to settle the obligations at the end of the reporting period . F-37 F-38 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 3 Significant Accounting Policies (Continued) Provisions for liabilities and charges. Provisions for liabilities and charges are non-financial liabilities of uncertain timing or amount . They are accrued when the Group has a present legal or constructive obligation as a result of past events, it is proba- ble that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made . Levies and charges, such as taxes other than income tax or regulatory fees based on information related to a period before the obligation to pay arises, are recognised as liabilities when the obligating event that gives rise to pay a levy occurs, as identified by the legislation that triggers the obligation to pay the levy . If a levy is paid before the obligating event, it is recognised as a prepayment . Other liabilities. Other liabilities are accrued when the counterparty has performed its obligations under the contract and are carried at amortised cost . Share capital. Ordinary shares are classified as equity . Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds and debited against share premium . Share premium. Share premium is the difference between the fair value of the consideration receivable for the issue of shares and the nominal value of the shares . The share premium account can only be resorted to for limited purposes, which do not include the distribution of dividends, and is otherwise subject to the provisions of the Cyprus Companies Law on reduction of share capital . Treasury shares. Where the Company or its subsidiaries purchase the Company’s equity instruments, the consideration paid, including any directly attributable incremental external costs, net of income taxes, is deducted from equity attributable to the owners of the Company until the equity instruments are reissued, disposed of or cancelled . Where such shares are subse- quently disposed of or reissued, any consideration received is included in equity . The value of GDRs transferred out of treasury shares for the purposes of the long-term incentive programme for management of the Group are determined based on the weighted average cost . Dividends. Dividends are recorded in equity in the period in which they are declared . Any dividends declared after the end of the reporting period and before the consolidated financial statements are authorised for issue, are disclosed in the Note “Events after the End of the Reporting Period” . The accounting reports of the Group entities are the basis for profit distribution and other appropriations . The separate financial statements of the Company prepared in accordance with IFRS as adopted by the EU and in accordance with Cyprus Companies Law is the basis of available reserves for distribution . Dividend distribution to the Company's shareholders is recognised as a liability in the Company's consolidated financial statements in the year in which the dividends are appropriately authorised and are no longer at the discretion of the Company . More specifically, interim dividends are recognised as a liability in the period in which these are authorised by the Board of Directors and in the case of final dividends, these are recognised in the period in which these are approved by the Company's shareholders . Interest income and expense recognition. Interest income and expense calculated using effective interest method are record- ed for all debt instruments, other than those at FVTPL, on an accrual basis using the effective interest method . This method defers, as part of interest income or expense, all fees paid or received between the parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts . Fees integral to the effective interest rate include origination fees (e .g . interchange fee on credit card loans) received or paid by the entity relating to the creation or acquisition of a financial asset or issuance of a financial liability . Commitment fees (e .g . annual fee on credit card loans) received by the Group to originate loans at market interest rates are integral to the effective interest rate if it is probable that the Group will enter into a specific lending arrangement and does not expect to sell the resulting loan shortly after origination . The Group does not designate loan commitments as financial liabili- ties at FVTPL . For financial assets that are originated or purchased credit-impaired, the effective interest rate is the rate that discounts the expected cash flows (including the initial expected credit losses) to the fair value on initial recognition (normally represented by the purchase price) . As a result, the effective interest is credit-adjusted . Interest income is calculated by applying the effective interest rate to the gross carrying amount of financial assets, except for: i) ii) financial assets that have become credit-impaired (Stage 3), for which interest revenue is calculated by applying the effec- tive interest rate to their AC (net of the ECL provision); and financial assets that are purchased or originated credit-impaired, for which the original credit-adjusted effective interest rate is applied to the AC . Customer acquisition expense recognition. Customer acquisition expenses are represented by the costs incurred by the Group on services related to attraction of the credit card borrowers, mailing of advertising materials, processing of responses etc . Those costs, which can be directly attributed to the acquisition of a particular client, are included in the effective interest rate of the originated financial instruments; the remaining costs are expensed on the basis of the actual services provided . Other income and expense recognition. All other income is generally recorded on an accrual basis by reference to comple- tion of the specific performance obligation assessed on the basis of measurement of the Group’s progress towards complete satisfaction of that performance obligation . All other expenses are generally recorded on an accrual basis by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided . Other similar income. Other similar income represents interest income recorded for debt instruments measured at fair value through profit or loss (“FVTPL”) and is recognised on an accrual basis using nominal interest rate . Other similar expense. Other similar expense represents finance cost related to the discounted lease payments using the incremental borrowing rate . Fee and commission income and expense. Fee and commission income is recognised over time as the services are rendered, when the customer simultaneously receives and consumes the benefits provided by the Group’s performance . Such income includes SMS fee and part of SME current accounts commission which represents fixed monthly payments . Variable fees are recognised only to the extent that management determines that it is highly probable that a significant reversal will not occur . Other fee and commission income is recognised at a point in time when the Group satisfies its performance obligation, usually upon execution of the underlying transaction . The amount of fee or commission received or receivable represents the transaction price for the services identified as distinct performance obligations . Such income includes fees for selling credit protection, merchant acquiring commission, part of SME current accounts commission which represents payments for each transaction, interchange fee, cash withdrawal fee, foreign currency exchange transactions fee, card to card commission, mort- gage agency fee and other . All fee and commission expenses are generally recorded on an accrual basis by reference to completion of the specific transac- tion assessed on the basis of the actual service provided as a proportion of the total services to be provided . Customer loyalty program. The group operates loyalty programs where retail clients accumulate points, which entitle them to reimbursement of purchases made with credit and debit cards . A financial liability is recognised for the amount of fair value of points expected to be redeemed until they are actually re- deemed or expire with the corresponding entries to interest income calculated using the effective interest rate method or com- mission expenses depending on whether the points were accumulated by credit card clients or debit card clients respectively . F-39 F-40 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 3 Significant Accounting Policies (Continued) Insurance contracts. Insurance contracts are those contracts that transfer significant insurance risk . Insurance risk exists when the Group has uncertainty in respect of at least one of the following matters at inception of the contract: occurrence of insurance event, date of occurrence of the insurance event, and the claim value in respect of the occurred insurance event . Such contracts may also transfer financial risk . Non-life insurance (short-term insurance). The below items from the consolidated statement of financial position of the Group are accounted within Other financial assets and Other financial liabilities lines, the below items from the consolidated statement of profit or loss and other comprehensive income of these consolidated financial statements are accounted within Income from insurance operations and Insurance claims incurred lines . • Premiums written. Premiums (hereafter – “premiums” or “insurance premiums”) under insurance contracts are recorded as written upon inception of a contract and are earned on a pro-rata basis over the term of the related contract coverage . Reduction of premium written in subsequent periods (under amendments to the signed original contacts, for example) is accounted by debiting of premiums written in current period . • Claims. Claims are charged to the consolidated statement of profit or loss and other comprehensive income as compensa- tion is paid to policyholders (beneficiaries) or third parties . • Claims handling expenses. Claims handling expenses are recognised in profit or loss for the period as incurred and include direct expenses related to negotiations and subsequent claims handling, as well as indirect expenses, including expenses of claims handling department and administrative expenses directly related to activities of this department . • Reinsurance. The Group assumes and cedes reinsurance in the normal course of business . Ceded reinsurance contracts do not relieve the Group from its obligations to the policyholders under insurance contract . Amounts due from reinsurers are measured consistently with the amounts associated with the direct insurance contracts and in accordance with the terms of each reinsurance contract . Reinsurance assets arising from outward reinsurance contracts include reinsurers share in paid claims, including claims handling expenses . Liabilities under outward reinsurance operations are obligations of the Group for payment of premiums to reinsurers . Reinsurance assets include premiums ceded to the Group under inward reinsurance contracts . The Group's liabilities under inward reinsurance contracts are obligations to compensate the Group's share in paid claims, including claims handling expenses to reinsurers . The Group assesses its reinsurance assets for impairment on a regular basis . If there is objective evidence that the reinsurance asset is impaired, the Group reduces the carrying amount of the reinsurance asset to its recoverable amount and recognises that impairment loss in the consolidated statement of profit or loss and other comprehensive income . The Group gathers the evidence that a reinsurance asset is impaired using the same process adopted for financial assets carried at amortised cost . The impairment loss is also calculated following the same method used for the financial assets carried at amortised cost . • Subrogation income. The Group has a right to pursue third parties responsible for loss for payment of some or all costs related to the claims settlement process of the Group (subrogation) . Reimbursements are recognised as income only if the Group is confident in receipt of these amounts from these third parties . Under inward reinsurance contracts, amounts of re- imbursement due to the Group as a result of settlement of reinsurer's subrogation claims are treated as the Group's income as at the date of acceptance of the invoice received from the reinsurer and including calculation of the Group's share in the subrogation claim . • Deferred acquisition costs. Deferred acquisition costs (“DAC”) are calculated (for non-life insurance contracts) separately for each insurance product . Acquisition costs include remuneration to agents for concluding agreements with corporate clients and individuals and brokerage fees for underwriting of assumed reinsurance agreements . They vary with and fully depend on the premium earned under acquired or renewed insurance policies . These acquisition costs are deferred and amortised over the period in which the related written premiums are earned . They are reviewed by line of business at the time of the policy issue and at the end of each accounting period to ensure they are recoverable based on future estimates . For the insurance contracts with duration of less than one month and with automatic prolongation condition amortisation of one-off acquisition costs occurs over the period determined based on statistical assessment of duration of the insurance contract taking into account all of the expected future prolongations . Insurance provisions • Provision for unearned premiums. Provision for unearned premiums (“UEPR”) represents the proportion of premiums written that relate to the unexpired term of policies in force as at the reporting date, calculated on a time apportionment basis . UEPR is recognised within liabilities on a gross basis . • Loss provisions. Loss provisions represent the accumulation of estimates for ultimate losses and include outstanding claims provision (“OCP”) and provision for losses incurred but not yet reported (“IBNR”) . Loss provisions are recognised within liabilities on a gross basis . Estimates of claims handling expenses are included in both OCP and IBNR . OCP is provid- ed in respect of claims reported, but not settled as at the reporting date . The estimation is made on the basis of informa- tion received by the Group during settlement of the insured event, including information received after the reporting date . IBNR is determined by the Group by line of business using actuarial methods, and includes assumptions based on prior years’ claims and claims handling experience . IBNR is calculated for each occurrence period as the difference between the projected maximum amount of future payments resulting from the events that occurred during the period and the amount of future payments resulting from the event already reported but not settled at the reporting date within the same period . The methods of determining such estimates and establishing the resulting provisions are continually reviewed and updated . Resulting adjustments are reflected in the consolidated statement of profit or loss and other comprehensive income as they arise . Loss provisions are estimated on an undiscounted basis due to relatively quick pattern of claims notification and payment . • Unexpired risk provision. Unexpired risk provision (“URP”) is recorded when unearned premiums are insufficient to meet claims and expenses, which may be incurred after the end of the financial year . To estimate the unexpired risk provision the Group uses historical experience and forward looking assumptions of ultimate loss ratios (including claims handling expenses) and the level of in-force portfolio maintenance expenses . The expected claims are calculated having regard to events that have occurred prior to the reporting date . For the purposes of final presentation of consolidated financial state- ments unexpired risk provision is written off against deferred acquisition costs . • Liability adequacy testing. As at each reporting date the adequacy of the insurance reserves is tested . Testing of insur- ance reserves for non-life insurance is performed to ensure adequacy of contract liabilities . In performing these tests, current estimates of future contractual cash flows, claims handling and administration expenses are used . As a result of liability adequacy testing for non-life insurance, the Group sets up its URP . Foreign currency translation and operations. The functional currency of the Company and each of the Group’s consolidated entities is the Russian Rouble (“RR”), which is the currency of the primary economic environment in which each entity oper- ates . Monetary assets and liabilities are translated into each entity’s functional currency at the official exchange rate of the CBRF at the end of the respective reporting period . Foreign exchange gains and losses resulting from the translation of monetary assets and liabilities into each entity’s functional currency at year-end official exchange rates of the CBRF are recognised in profit or loss for the year as Net gains/(losses) from foreign exchange translation . Foreign exchange gains and losses resulting from the settlement of transactions with foreign currencies are recognised in profit or loss for the year as net (losses)/gains from operations with foreign currencies (except for clients’ foreign currency exchange transactions fee, which is recognised in profit or loss as fee and commission income) . Translation at year-end rates does not apply to non-monetary items that are measured at historical cost . At 31 December 2019 the rate of exchange used for translating foreign currency balances was USD 1 = RR 61 .9057 (31 December 2018: USD 1 = RR 69 .4706), and the average rate of exchange was USD 1 = RR 64 .7362 (2018: USD 1 = RR 62 .7078) . Offsetting. Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial po- sition only when there is a legally enforceable right to offset the recognised amounts, and there is an intention to either settle on a net basis, or to realise the asset and settle the liability simultaneously . Such a right of set off (a) must not be contingent on a future event and (b) must be legally enforceable in all of the following circumstances: (i) in the normal course of business, (ii) the event of default and (iii) the event of insolvency or bankruptcy . F-41 F-42 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 3 Significant Accounting Policies (Continued) Earnings per share. Earnings per share are determined by dividing the profit or loss attributable to owners of the Company by the weighted average number of participating shares outstanding during the reporting year, excluding treasury shares . For the purpose of diluted earnings per share calculation the Group considers dilutive effects of shares granted under employee share option plans . Staff costs and related contributions. Wages, salaries, contributions to the Russian Federation state pension and social insurance funds, paid annual leave and sick leave, bonuses, and non-monetary benefits are accrued in the year in which the associated services are rendered by the employees of the Group . The Group has no legal or constructive obligation to make pension or similar benefit payments beyond the payments to the statutory defined contribution scheme . Segment reporting. Segments are reported in a manner consistent with the internal reporting provided to the Group’s chief operating decision maker . Segments whose revenue, result or assets are ten percent or more of all the segments are reported separately . Equity-settled share-based payment. The expense is recognized over the vesting period and is measured at the fair value of the award determined at the grant date, which is amortized over the service (vesting) period . The fair value of the equity award is estimated only once at the grant date and is trued up to the estimated number of instruments that are expected to vest . Div- idends declared during the vesting period accrue and are paid to the employee together with the sale proceeds of the vested shares upon a liquidity event . Expected dividends (including those expected during the vesting period) are therefore included in the determination of fair value of the share-based payment . Amendments of the consolidated financial statements after issue. The Board of Directors of the Company has the power to amend the consolidated financial statements after issue . Effective interest rate. During 2019 as a result of futher development of its data and IT systems the Group identified the part of customer acquisition expenses which can be directly linked to the particular borrower, and which are incremental in nature, such as partnership call-centre expenses, internet acquisition expenses and related VAT expenses as well as changed the pattern of recognition of certain types of expenses which were included into the effective interest rate, such as partnership expenses (external partner channels of customers’ acquisition) and cards issuing expenses . Having obtained sufficient and rep- resentative statistical information the management of the Group changed the accounting policy in relation to these expenses and allocated them directly to the originated financial instruments and included them in the effective interest rate . The effect of this change in accounting policy for prior periods was credited to the consolidated statement of profit or loss and other com- prehensive income for the year ended 31 December 2019 . Prior periods were not amended due to the change not resulting in a material impact for any individual prior period . Changes in presentation. During 2019 the Group identified the part of customer acquisition expenses, which can be directly linked to the debit product customers and which are incremental in nature, such as partnerships, internet acquisition and cards issuing expenses, and allocated them directly to the originated financial instruments and included them in the interest expenses . In 2019 the management of the Group refined its approach to the presentation of expenses related to the direct settlement of losses in compulsory third party liability insurance in the consolidated condensed interim statement of profit or loss and other comprehensive income . The management concluded it was appropriate to reclassify these expenses from Administrative and other operating expenses to Insurance claims incurred because these expenses in substance represent part of claims incurred on compulsory third party liability insurance . In 2019 the management of the Group made a detailed review of the VAT expenses recognised in administrative and other operating expenses and using improved technical reports identified the part of VAT expenses which is related to customer acquisition expenses . The management concluded it was appropriate to reclassify these expenses from Administrative and other operating expenses to Customer acquisition expense because such reclassification makes presentation of VAT expenses more relevant and precise . In 2019 the management of the Group made a detailed review of the components that make up interest income and identi- fied one type of fee (payment channels fee) which now has more characteristics of being a service fee than being part of the effective interest income of the loans . The management considers that the reclassification of this fee to Fee and commission expense will result in a more reliable and relevant presentation of the financial information and is more consistent with the market practice of many other banks . The reclassification does not result in any change to the amount recognised in respect of these fees in any one period . Prior periods were not amended due to the change not resulting in a material impact for any individual prior period . In 2019 the management of the Group made a detailed review of the components that make up fee and commission expense and identified partnership expenses (external partner channels of customers’ acquisition) which have more characteristics of being customer acquisition expenses than being of fee and commission expenses . The management considers that the reclas- sification of these expenses to Customer acquisition expenses will result in a more reliable and relevant presentation of the financial information . The reclassification does not result in any change to the amount of income recognised in respect of these expenses in any one period . In these consolidated financial statements the management of the Group improved the presentation of the results of opera- tions with foreign currencies, derivatives revaluation and foreign exchange translation and disclosed separately in the consoli- dated statement of profit or loss and other comprehensive income the following line items: Net (losses)/gains from operations with foreign currencies, Net (losses)/gains from derivatives revaluation, Net gains/(losses) from foreign exchange translation . In these consolidated financial statements the management of the Group improved the presentation of the cash flows from the insurance operations and disclosed separately in the consolidated statement of cash flows the following line items: Premiums received from insurance operations and Claims paid from insurance operations The management considers that such im- proved and more detailed disclosure provides users of these consolidated financial statements with more relevant information . The effect of changes described above on the consolidated statement of profit or loss and other comprehensive income for the year ended 31 December 2018 is as follows: In millions of RR Interest income calculated using the effective interest rate method Interest expense calculated using the effective interest rate method Customer acquisition expense Insurance claims incurred Administrative and other operating expenses Fee and commission expense Net (losses)/gains from operations with foreign currencies Net (losses)/gains from derivatives revaluation Net gains/(losses) from foreign exchange translation As originally presented Reclassification As reclassified 75,041 1,228 76,269 (15,106) (13,100) (1,968) (23,023) (10,751) 10 - - (453) (1,122) (158) 1,524 (1,019) 371 1,784 (2,155) (15,559) (14,222) (2,126) (21,499) (11,770) 381 1,784 (2,155) F-43 F-44 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 3 Significant Accounting Policies (Continued) The effect of changes described above on the consolidated statement of cash flows for the year ended 31 December 2018 is as follows: In millions of RR Interest income received calculated using the effective interest rate method Interest expense paid calculated using the effective interest rate method Customer acquisition expense paid Administrative and other operating expenses paid Fees and commissions paid Cash (paid)/received from operations with foreign currencies Cash (paid)/received from operations with derivatives Premiums received from insurance operations Claims paid from insurance operations Cash received from insurance operations As originally presented Reclassification As reclassified 72,169 1,228 73,397 (14,240) (14,419) (22,451) (10,569) 2,962 - - - 5,152 (453) (1,122) 1,524 (1,019) (2,581) 2,581 7,044 (2,050) (5,152) (14,693) (15,541) (20,927) (11,588) 381 2,581 7,044 (2,050) - 4 Critical Accounting Estimates and Judgements in Applying Accounting Policies The Group makes estimates and assumptions that affect the amounts recognized in the consolidated financial statements and the carrying amounts of assets and liabilities within the next financial year . Estimates and judgements are continually evaluat- ed and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances . Management also makes certain judgements, apart from those involving estimations, in the process of applying the accounting policies . Judgements that have the most significant effect on the amounts recog- nized in the consolidated financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year include: ECL measurement. Calculation and measurement of ECLs is an area of significant judgement and involves methodology, models and data inputs . The following components of ECL calculation have a major impact on credit loss allowance: probability of default (“PD”) (impacted by definition of default, SICR, forward-looking scenarios and theirs weights) and loss given default (“LGD”) . Refer to Note 31 for explanation of terms . The Group regularly reviews and validates models and inputs to the models to reduce any differences between expected credit loss estimates and actual credit loss experience . Refer to Note 31 for fur- ther information on ECL measurement . If a 100% weight is applied to the optimistic macroeconomic forward-looking scenario the ECL will be RR 2,797 million lower (2018: RR 821 million lower) . If a 100% weight is applied to the pessimistic macroeconomic forward-looking scenario the ECL will be RR 3,000 million higher (2018: RR 1,328 million higher) . An increase or decrease in PDs by 1% compared to PDs used in the ECL estimates calculated at 31 December 2019 would result in an increase or decrease in credit loss allowances of RR 2,092 million (2018: RR 1,598 million) . An increase or decrease in LGDs by 1% compared to LGDs used in the ECL estimates calculated at 31 December 2019 would result in an increase or decrease in credit loss allowances of RR 462 million (2018: RR 372 million) . During 2019 as a result of the accumulation of further statistics on the recoveries of the defaulted loans in courts the Group increased the period over which the recoveries are analysed for the purposes of LGD calculation for loans in courts . The Group recorded this change in 2019 as a decrease in the amount of credit loss allowances of RR 47 million . During 2019 the Group made changes to the methodology of estimation of the PD of new originated credit cards loans and introduced application PD model instead of default rate model . The Group recorded this change in 2019 as a decrease in the amount of credit loss allowances of RR 212 million for credit card loans and of RR 163 million for credit related commitments . During 2019 the Group improved the way how forward-looking information is incorporated in the ECL models by including an additional economic variable . The Group recorded this change in 2019 as a decrease in the amount of credit loss allowances of RR 201 million . During 2018 as a result of the accumulation of reliable statistics of the recoveries of the defaulted credit card loans, cash loans, POS loans the Group increased the period over which the recoveries are analysed for the purposes of LGD calculation for these loans . The Group recorded these changes in 2018 as a decrease in the amount of credit loss allowances of RR 261 million . Credit exposure on revolving credit facilities. For credit card loans, the Group's exposure to credit losses extends beyond the maximum contractual period of the facility . For such facilities the Group measures ECLs over the period that the Group is exposed to credit risk and ECLs are not mitigated by credit risk management actions . Application of this approach requires judgement: determining a period for measuring ECLs — the Group considers historical information and experience about: (a) the length of time for related defaults to occur on similar financial instruments following a SICR and (b) the credit risk man- agement actions that the Group expects to take once the credit risk has increased (e .g . the reduction or removal of undrawn limits) . For details of the period over which the Group is exposed to credit risk on revolving facilities and which is used as an approxi- mation of lifetime period for ECL calculation for stage 2 and stage 3 loans and advances to customers, refer to Note 31 . Perpetual subordinated bonds. A perpetual subordinated bond issue in June 2017 was initially recognised in the amount of USD 295 .8 million (RR 16 .9 billion) represented by the funds received from investors less issuance costs . Subsequent measurement of this instrument is consistent with the accounting policy for debt securities in issue . Interest expense on the instrument is calculated using the effective interest rate method and recognised in profit or loss for the year . In the event the accrued interest is paid, the payment decreases the balance of the liability . A cancellation of accrued inter- est for a given period results in its conversion, at the Group's option, into equity and therefore the respective amount of the liability is reclassified to equity . Foreign exchange translation gains and losses on the bond are recognised in profit or loss for the period . Application of this approach requires judgement: the Group has taken into consideration that there are genuine contingent settlement provisions that could arise and as such has classified the perpetual subordinated bond instrument in its entirety as a liability, rather than equity, on the basis of terms of issue which stipulate the possible redemption of the instru- ment in several cases other than liquidation of the issuer . If the Group had recognized this instrument as equity, then interest expense would only have been recognized when it was paid and treated as a distribution from equity rather than an expense in profit or loss . The Group also from time to time invests in perpetual subordinated bonds issued by third parties . The Group has taken into consideration that there are genuine contingent settlement provisions that could arise and as such has classified the invest- ments in perpetual subordinated bonds as investments in debt securities on the basis of terms of issue which stipulate the possible redemption of the instrument in several cases other than liquidation of the issuer . The investments in these instruments are classified as debt investment securities measured at FVTPL since the analysis of the contractual cash flow characteristics resulted in acquired perpetual bonds not passing SPPI test . If the Group had recognized this instrument as equity instrument, then it could have been measured at FVTPL or FVOCI as the Group does not hold it for trading purposes . Interest income recognition. The effective interest method incorporates significant assumptions around expected loan lives as well as judgements of type of fees and costs that are included in interest income . Refer to Note 3 . F-45 F-46 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 4 Critical Accounting Estimates and Judgements in Applying Accounting Policies(Continued) Unbundling of loans and insurance products. Certain loans issued by the Group are forgivable upon events such as the borrower's death, or the borrower becoming unemployed because the Insurance Company's products cover repayments of the related loan products issued by the Bank in such cases . The Group is able to measure the loans separately and, as well as being able to take a loan without insurance at the time of issuance, the borrowers can cancel the insurance products at any time, separately from the loan . Accordingly, the Group unbundled the loans from the overall arrangement . The portion of the fee attributable to the insurance component is recognised within Insurance premiums earned line (refer to Note 24) . The remaining portion of the fee approximates a fee that would have been earned on market terms for selling third party insurance products and it is recognised as fee for selling credit protection within Fee and commission income line (refer to Note 22) . The following amended standards became effective from 1 January 2019, but did not have any material impact on the Group: • IFRIC 23 "Uncertainty over Income Tax Treatments" (issued on 7 June 2017 and effective for annual periods beginning on or after 1 January 2019) . • Prepayment Features with Negative Compensation – Amendments to IFRS 9 (issued on 12 October 2017 and effective for annual periods beginning on or after 1 January 2019) . • Amendments to IAS 28 “Long-term Interests in Associates and Joint Ventures” (issued on 12 October 2017 and effective for annual periods beginning on or after 1 January 2019) . • Annual Improvements to IFRSs 2015-2017 cycle – amendments to IFRS 3, IFRS 11, IAS 12 and IAS 23 (issued on 12 De- cember 2017 and effective for annual periods beginning on or after 1 January 2019) . • Amendments to IAS 19 “Plan Amendment, Curtailment or Settlement” (issued on 7 February 2018 and effective for annual periods beginning on or after 1 January 2019) . Tax legislation. Russian and Cypriot tax, currency and customs legislation are subject to varying interpretations . Refer to Note 33 . 6 New Accounting Pronouncements 5 Adoption of New or Revised Standards and Interpretations Adoption of IFRS 16, Leases (issued on 13 January 2016 and effective for annual periods beginning on or after 1 Jan- uary 2019). The Group has adopted IFRS 16 with a date of transition of 1 January 2019 and applied the standard using the modified retrospective method, without restatement of comparatives (Note 3) . The new standard sets out the principles for the recognition, measurement, presentation and disclosure of leases . All leases result in the lessee obtaining the right to use an asset at the start of the lease and, if lease payments are made over time, also obtaining financing . Accordingly, IFRS 16 eliminates the classification of leases as either operating leases or finance leases as is required by IAS 17 and, instead, introduces a single lessee accounting model . The Group recognised a right of use asset of RR 1,671 million against a corresponding lease liability on 1 January 2019 . Right- of-use assets are mainly represented by leases of office premises . A reconciliation of the operating lease commitments to this liability is as follows: In millions of RR 1 January 2019 Legally non-cancellable minimum operating lease commitments Additional lease commitments which relate to the inforceable period of lease Lease payments under operating lease (based on requirements of IFRS 16)* Recognition exemption: the underlying asset is of low value Future lease payments under IFRS 16 Effect of discounting (the weighted average incremental borrowing rate used 7 .6%) Lease liabilities under IFRS 16 Amount of prepayments and irrevocable security payments on agreements Right-of-use assets under IFRS 16 829 1,288 2,117 (216) 1,901 (236) 1,665 6 1,671 * The amount of lease payments under operating lease as at 1 January 2019 presented above differs from the amount of operating lease commitments disclosed in the Note 36 to the consolidated financial statements of the Group for the year ended 31 December 2018 because the amount of operating lease commitments disclosed in the Note 36 to the consolidated financial statements of the Group for the year ended 31 December 2018 included only legally non-cancellable minimum operating lease commitments (based on termination notice in lease contracts), while the above table includes those lease commitments which relate to the enforceable period of lease based on the requirements of IFRS 16 and the IFRIC Agenda decision about the lease term. Certain new amendments have been issued that are mandatory for the annual periods beginning on or after 1 January 2020: Interest rate benchmark reform – Amendments to IFRS 9, IAS 39 and IFRS 7 (issued on 26 September 2019 and effective for annual periods beginning on or after 1 January 2020). The amendments were triggered by replacement of benchmark interest rates such as LIBOR and other inter-bank offered rates (‘IBORs’) . The amendments provide temporary relief from applying specific hedge accounting requirements to hedging relationships directly affected by the IBOR reform . IFRS 17 "Insurance Contracts"(issued on 18 May 2017 and effective for annual periods beginning on or after 1 January 2021)*. IFRS 17 replaces IFRS 4, which has given companies dispensation to carry on accounting for insurance contracts using existing practices . As a consequence, it was difficult for investors to compare and contrast the financial performance of otherwise similar insurance companies . IFRS 17 is a single principle-based standard to account for all types of insurance contracts, includ- ing reinsurance contracts that an insurer holds . The standard requires recognition and measurement of groups of insurance con- tracts at: (i) a risk-adjusted present value of the future cash flows (the fulfilment cash flows) that incorporates all of the available information about the fulfilment cash flows in a way that is consistent with observable market information; plus (if this value is a liability) or minus (if this value is an asset) (ii) an amount representing the unearned profit in the group of contracts (the contrac- tual service margin) . Insurers will be recognising the profit from a group of insurance contracts over the period they provide insur- ance coverage, and as they are released from risk . If a group of contracts is or becomes loss-making, an entity will be recognising the loss immediately . The Group is currently assessing the impact of IFRS 17 on the insurance contracts issued by the Insurance Company as well as the impact for credit cards and similar loan products which may include insurance component . The following other new pronouncements are not expected to have any material impact on the Group when adopted: (a) Amendments to the Conceptual Framework for Financial Reporting (issued on 29 March 2018 and effective for annual periods beginning on or after 1 January 2020) .The revised Conceptual Framework includes a new chapter on measurement; guidance on reporting financial performance; improved definitions and guidance - in particular the definition of a liability; and clarifica- tions in important areas, such as the roles of stewardship, prudence and measurement uncertainty in financial reporting . (b) Amendments to IFRS 3: Definition of a business (issued on 22 October 2018 and effective for acquisitions from the begin- ning of annual reporting period that starts on or after 1 January 2020)* . (c) Amendments to IAS 1 and IAS 8: Definition of materiality (issued on 31 October 2018 and effective for annual periods beginning on or after 1 January 2020) . (d) Amendments to IAS 1: Classification of liabilities as current or non-current (issued on 23 January 2020 and effective for annual periods beginning on or after 1 January 2022)* . (e) Amendments to IFRS 10 and IAS 28: Sale or contribution of assets between an Investor and its associate or joint venture (issued on 11 September 2014 and effective for annual periods beginning on or after a date to be determined by the IASB)* . The Group is currently assessing the impact of the above standards on its consolidated financial statements . * Denotes standards, interpretations and amendments which have not yet been endorsed by the European Union. F-47 F-48 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 7 Cash and Cash Equivalents In millions of RR Cash on hand Cash balances with the CBRF (other than mandatory reserve deposits) Placements with other banks with original maturities of less than three months: - AA- to AA+ rated - A- to A+ rated - BBB- to BBB+ rated - BB- to BB+ rated - B- to B+ rated - CCC+ rated Non-bank credit organizations: - BBB- to BBB+ rated - Unrated Total Cash and Cash Equivalents 31 December 2019 31 December 2018 11,118 16,599 5,839 11,158 2,302 599 1,430 503 67 2 21,096 4,080 57,796 1,130 761 1,317 360 114 - 12,137 986 33,802 Cash on hand includes cash balances in ATMs and cash balances in transit . Placements with other banks and organizations with original maturities of less than three months include placements under reverse sale and repurchase agreements in the amount of RR 20,681 million as at 31 December 2019 (31 December 2018: RR 11,147 million) . The Group has a right to sell or repledge securities received under reverse sale and repurchase agreements . The table below discloses the credit quality of cash and cash equivalents balances based on credit risk grades at 31 December 2018: In millions of RR Excellent Good Monitor Sub-standard Cash balances with the CBRF - 11,158 - - Placements with other banks and non- bank credit organi- zations 1,891 Total 1,891 13,789 24,947 1,018 107 1,018 107 Total cash and cash equivalents, excluding cash on hand 11,158 16,805 27,963 The carrying amount of cash and cash equivalents at 31 December 2019 and 2018 also represents the Group's maximum exposure to credit risk on these assets . Refer to Note 31 for the description of the Group’s credit risk grading system . For the purpose of ECL measurement cash and cash equivalents balances are included in Stage 1 . The ECL for these balances represents an immaterial amount, therefore the Group did not recognise any credit loss allowance for cash and cash equiv- alents . Except for reverse sale and repurchase agreements, amounts of cash and cash equivalents are not collateralised . As at 31 December 2019 the fair value of collateral under reverse sale and repurchase agreements was RR 22,369 million (31 December 2018: RR 12,389 million) . There is no material impact of collateral on credit loss allowance for cash and cash equiv- alents . Refer to Note 38 for the disclosure of the fair value of cash and cash equivalents . ECL measurement approach, interest rate, maturity and geographical risk concentration analysis of cash and cash equivalents are disclosed in Note 31 . 8 Due from Other Banks The table below discloses the credit quality of cash and cash equivalents balances based on credit risk grades at 31 December 2019: In millions of RR In millions of RR Excellent Good Monitor Doubtful Placements with other banks and non-bank credit organizations Cash balances with the CBRF - 16,599 - - 2,901 23,031 4,145 2 Total 2,901 39,630 4,145 2 Total cash and cash equivalents, excluding cash on hand 16,599 30,079 46,678 Placements with other banks with original maturities of more than three months - BBB- rated - BB- to BB+ rated - B- to B+ rated Total due from other banks 31 December 2019 31 December 2018 204 1,419 461 2,084 210 128 438 776 The table below discloses the credit quality of due from banks balances based on credit risk grades: In millions of RR Good Monitor Total due from other banks 31 December 2019 31 December 2018 1,577 507 2,084 338 438 776 The carrying amount of due from other banks at 31 December 2019 and 2018 also represents the Group's maximum exposure to credit risk on these assets . Refer to Note 31 for the description of credit risk grading system used by the Group . For the purpose of ECL measurement due from other banks balances are included in Stage 1 . The ECL for these balances represents an immaterial amount, therefore the Group did not create any credit loss allowance for due from other banks . Refer to Note 31 for the ECL measurement approach . Refer to Note 38 for the disclosure of the fair value of due from other banks . Interest rate, maturity and geographical risk concentration analysis are disclosed in Note 31 . F-49 F-50 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 9 Loans and Advances to Customers In millions of RR Credit card loans Cash loans Secured loans POS loans Car loans Loans to IE and SME Total loans and advances to customers at AC 31 December 2019 31 December 2018 Gross carry- ing amount Credit loss allowance Carrying amount Gross carry- ing amount Credit loss allowance Carrying amount 244,937 (44,129) 200,808 177,990 (33,296) 144,694 62,265 (8,029) 54,236 35,495 (2,331) 29,601 (496) 29,105 2,644 25,940 (1,057) 24,883 15,380 20,156 1,013 (913) (113) 19,243 900 2,838 363 (16) (460) (85) (33) 33,164 2,628 14,920 2,753 330 383,912 (54,737) 329,175 234,710 (36,221) 198,489 Credit cards are issued to customers for cash withdrawals or payment for goods or services, within the range of limits estab- lished by the Bank . These limits may be increased or decreased from time-to-time based on management decision . Credit card loans are not collateralized . Cash loans represent a product for the borrowers who have a positive credit history and who do not have overdue loans in other banks . Cash loans are loans provided to customers via the Bank’s debit cards . These loans are available for withdrawal without commission . POS (“Point of sale”) loans represent POS lending through the Bank’s programme “POS loans” . This programme funds online and offline purchases through internet and offline shops for individual borrowers . Secured loans represent loans secured with a car or real estate . Car loans represent loans for the purchase of a vehicle which is used as collateral under the loan . Loans to IE and SME represent loans provided by the Bank to individual entrepreneurs and small and medium businesses for the purpose of working capital management . The credit loss allowance for loans and advances to customers recognised in the period is impacted by a variety of factors . The main movements in the tables presented below are described as follows: • new originated or purchased category represents the gross carrying amounts and the related ECL of purchased loans and loans issued during the reporting period (and withdrawals of limits of new credit card borrowers) as at the end of the reporting period or as at the date of transfer of loan out of stage 1 (whichever date is earlier); • transfers between Stage 1, 2 and 3 due to balances experiencing significant increases (or decreases) of credit risk or becoming credit-impaired in the period, and the consequent "step up" (or “step down”) between 12-month and Lifetime ECL . Transfers pres- ent the amount of credit loss allowance charged or recovered at the moment of transfer of a loan among the respective stages; • changes to ECL measurement model assumptions and estimates represent movements due to changes in PDs, EADs and LGDs models during the period; • movements other than transfers and new originated or purchased loans category represent all other movements of ECL in particular related to changes in gross carrying amounts (including drawdowns, repayments, and accrued interest), as well as changes in ECL model assumptions including those arising from update of inputs to ECL model in the period; • write-offs of allowances are related to assets that were written-off during the period; • unwinding of discount (for Stage 3) category represents adjustment to credit loss allowance and gross carrying amount for Stage 3 loans to increase it to discounted amount of the expected cash shortfalls to the reporting date using the effective interest rate . The following tables disclose the changes in the credit loss allowance and gross carrying amount for loans and advances to customers between the beginning and the end of the reporting and comparative periods: Credit loss allowance Gross carrying amount Stage 1 Stage 2 (12-months ECL) (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit im- paired) Stage 1 Stage 2 (12-months ECL) Total (lifetime ECL for SICR) Stage 3 Purchased/ (lifetime ECL for credit impaired) originat- ed credit impaired Total In millions of RR Credit card loans At 31 December 2018 9,266 4,708 19,322 33,296 145,732 6,654 25,497 107 177,990 Movements with impact on credit loss allowance charge for the year: New originated or purchased Transfers: - to lifetime (from Stage 1 to Stage 2) - to credit-impaired (from Stage 1 and Stage 2 to Stage 3) - recovered (from Stage 3 to Stage 2 and from Stage 2 to Stage 1) Changes to ECL meas- urement model assump- tions and estimates Movements other than transfers and new originated or purchased loans Total movements with impact on credit loss allowance charge for the year Movements without impact on credit loss al- lowance charge the year Unwinding of discount (for Stage 3) Write-offs Sales Modification of original cash flows without derecognition 5,356 - - 5,356 63,177 - - 241 63,418 (2,478) 6,097 - 3,619 (11,142) 11,142 - (4,644) (4,111) 21,348 12,593 (21,206) (5,322) 26,528 233 (756) (21) (544) 1,101 (1,077) (24) (387) - (26) (413) - - - - - - - - - - - 4,358 915 (4,267) 1,006 20,134 35 (5,771) (12) 14,386 2,438 2,145 17,034 21,617 52,064 4,778 20,733 229 77,804 - - - - - - - 3,133 3,133 (10,999) (10,999) (986) (986) - (1,932) (1,932) - - - - - - - 3,133 (10,999) (1,059) - - - 3,133 (10,999) (1,059) - (1,932) - (1,932) At 31 December 2019 11,704 6,853 25,572 44,129 197,796 11,432 35,373 336 244,937 F-51 F-52 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 9 Loans and Advances to Customers (Continued) Credit loss allowance Gross carrying amount Stage 1 Stage 2 (12-months ECL) (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit im- paired) Stage 1 Stage 2 (12-months ECL) Total (lifetime ECL for SICR) Stage 3 Purchased/ (lifetime ECL for credit im- paired) originated credit impaired Total In millions of RR Credit card loans At 1 January 2018 9,064 5,319 21,689 36,072 121,988 6,958 25,598 42 154,586 Movements with impact on credit loss allowance charge for the year New originated or purchased Transfers: - to lifetime (from Stage 1 to Stage 2) - to credit-impaired (from Stage 1 and Stage 2 to Stage 3) - recovered (from Stage 3 to Stage 2 and from Stage 2 to Stage 1) Changes to ECL meas- urement model assump- tions and estimates Movements other than transfers and new originated or purchased loans Total movements with impact on credit loss allowance charge for the year Movements without impact on credit loss allowance charge for the year Unwinding of discount (for Stage 3) Write-offs Sales Modification of original cash flows without derecognition 2,884 - - 2,884 34,791 - (1,647) 4,319 - 2,672 (6,465) 6,465 - - (3,063) (4,636) 16,804 9,105 (13,933) (5,569) 19,502 295 (930) (29) (664) 1,216 (1,184) (32) (19) (9) (257) (285) - - - 94 34,885 - - - - - - - - 1,752 645 (3,245) (848) 8,135 (16) (3,902) (29) 4,188 202 (611) 13,273 12,864 23,744 (304) 15,568 65 39,073 - - - - - - - 3,098 3,098 (16,899) (16,899) (395) (395) - (1,444) (1,444) - - - - - - - 3,098 (16,899) (424) - - - 3,098 (16,899) (424) - (1,444) - (1,444) At 31 December 2018 9,266 4,708 19,322 33,296 145,732 6,654 25,497 107 177,990 Credit loss allowance Gross carrying amount Stage 1 Stage 2 (12-months ECL) (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit im- paired) Stage 1 Stage 2 (12-months ECL) Total (lifetime ECL for SICR) Stage 3 Purchased/ (lifetime ECL for credit im- paired) originated credit im- paired Total In millions of RR Cash loans At 31 December 2018 1,116 545 670 2,331 32,651 1,776 767 301 35,495 Movements with impact on credit loss allowance charge for the year: New originated or purchased Transfers: - to lifetime (from Stage 1 to Stage 2) - to credit-impaired (from Stage 1 and Stage 2 to Stage 3) - recovered (from Stage 3 to Stage 2 and from Stage 2 to Stage 1) Changes to ECL measurement model assumptions and estimates Movements other than transfers and new orig- inated or purchased loans Total movements with impact on credit loss allowance charge for the year Movements without im- pact on credit loss allow- ance charge the year Unwinding of discount (for Stage 3) Write-offs Sales Modification of original cash flows without derecognition 2,628 - - 2,628 44,199 - - 422 44,621 (587) 2,960 - 2,373 (5,663) 5,663 - (897) (528) 3,927 2,502 (3,536) (699) 4,235 14 (78) - (64) 408 (408) (22) - (1) (23) - - - - - - - - - - - - 106 (1,017) 193 (718) (16,134) (1,298) 676 (87) (16,843) 1,242 1,337 4,119 6,698 19,274 3,258 4,911 335 27,778 - - - - - - - 138 138 (524) (524) (114) (114) - (500) (500) - - - - - - - 138 (524) (122) - - - 138 (524) (122) - (500) - (500) At 31 December 2019 2,358 1,882 3,789 8,029 51,925 5,034 4,670 636 62,265 F-53 F-54 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 9 Loans and Advances to Customers (Continued) Credit loss allowance Gross carrying amount Stage 1 Stage 2 (12-months ECL) (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit im- paired) Stage 1 Stage 2 Stage 3 Purchased/ (12-months ECL) Total (lifetime ECL for credit im- paired) (lifetime ECL for SICR) originated credit im- paired Total In millions of RR Cash loans At 1 January 2018 268 151 156 575 6,478 438 161 177 7,254 Credit loss allowance Gross carrying amount Stage 1 Stage 2 (12-months ECL) (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit impaired) Stage 1 Stage 2 (12-months ECL) Total (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit impaired) Total In millions of RR Secured Loans At 31 December 2018 15 1 - 16 2,641 3 - 2,644 Movements with impact on credit loss allowance charge for the year: New originated or purchased 168 - - 168 27,907 - - 27,907 Movements with impact on credit loss allowance charge for the year New originated or pur- chased loans Transfers: - to lifetime (from Stage 1 to Stage 2) - to credit-impaired (from Stage 1 and Stage 2 to Stage 3) - recovered (from Stage 3 to Stage 2 and from Stage 2 to Stage 1) Changes to ECL measure- ment model assumptions and estimates Movements other than transfers and new origi- nated or purchased loans Total movements with impact on credit loss allowance charge for the year Movements without impact on credit loss allowance charge for the year Unwinding of discount (for Stage 3) Write-offs Sales Modification of origi- nal cash flows without derecognition 1,255 - - 1,255 32,010 - (162) 968 - 806 (1,953) 1,953 - - (147) (129) 673 397 (549) (156) 705 4 (23) - (19) 96 (96) 8 3 (2) 9 - - - - 144 32,154 - - - - - - - - Transfers: - to lifetime (from Stage 1 to Stage 2) - to credit-impaired (from Stage 1 and Stage 2 to Stage 3) - to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) Movements other than trans- fers and new originated or purchased loans Total movements with impact on credit loss allowance charge for the year Movements without impact on credit loss allowance charge the year Unwinding of discount (for Stage 3) Modification of original cash flows (23) 499 - 476 (2,141) 2,141 - (6) - - - 81 75 (203) - 203 - - 1 (1) - - - (945) - - (4) (236) 6 (234) (839) (106) 135 263 87 485 24,725 2,034 203 26,962 - - - - 3 (8) 82 3 (8) - - - - 3 (8) 3 (8) 496 27,366 2,037 198 29,601 (110) (425) 157 (378) (3,431) (363) 214 (20) (3,600) At 31 December 2019 150 264 848 394 827 2,069 26,173 1,338 919 124 28,554 - - - - - - - - 43 43 (256) (256) (19) (19) (81) (81) - - - - - - - 43 (256) (19) - - - 43 (256) (19) - (81) - (81) Secured loans At 1 January 2018 Movements with impact on credit loss allowance charge for the year - - - - - - - - New originated or purchased 15 - - 15 2,644 - - 2,644 Transfers: - to lifetime (from Stage 1 to Stage 2) Total movements with impact on credit loss allowance charge for the year At 31 December 2018 - 15 15 1 1 1 - - - 1 (3) 16 2,641 16 2,641 3 3 3 - - - - 2,644 2,644 At 31 December 2018 1,116 545 670 2,331 32,651 1,776 767 301 35,495 F-55 F-56 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 9 Loans and Advances to Customers (Continued) Credit loss allowance Gross carrying amount Stage 1 Stage 2 (12-months ECL) (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit im- paired) Stage 1 Stage 2 (12-months ECL) Total (lifetime ECL for SICR) Stage 3 Purchased/ (lifetime ECL for credit impaired) originat- ed credit impaired Total In millions of RR POS loans At 31 December 2018 190 81 189 460 14,560 505 210 105 15,380 Movements with impact on credit loss allowance charge for the year: New originated or pur- chased Transfers: - to lifetime (from Stage 1 to Stage 2) - to credit-impaired (from Stage 1 and Stage 2 to Stage 3) - recovered (from Stage 3 to Stage 2 and from Stage 2 to Stage 1) Changes to ECL measure- ment model assumptions and estimates Movements other than transfers and new originat- ed or purchased loans Total movements with impact on credit loss allowance charge for the year Movements without impact on credit loss allowance charge the year Unwinding of discount (for Stage 3) Write-offs Sales Modification of origi- nal cash flows without derecognition 357 - - 357 23,779 - - 145 23,924 (61) 479 - 418 (1,673) 1,673 - (71) (92) 614 451 (518) (137) 655 1 (7) - (6) 112 (112) (15) (7) (1) (23) - - - - - - - - - - - - (103) (264) (61) (428) (12,229) (876) (34) (52) (13,191) 108 109 552 769 9,471 548 621 93 10,733 - - - - - - - - 19 19 (131) (131) (23) (23) (37) (37) - - - - - - - 19 (131) (24) - - - 19 (131) (24) - (37) - (37) Credit loss allowance Gross carrying amount Stage 1 Stage 2 (12-months ECL) (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit im- paired) Stage 1 Stage 2 (12-months ECL) Total (lifetime ECL for SICR) Stage 3 Purchased/ (lifetime ECL for credit im- paired) originated credit im- paired Total In millions of RR POS loans At 1 January 2018 133 46 125 304 4,462 162 129 57 4,810 Movements with impact on credit loss allowance charge for the year New originated or pur- chased Transfers: - to lifetime (from Stage 1 to Stage 2) - to credit-impaired (from Stage 1 and Stage 2 to Stage 3) - recovered (from Stage 3 to Stage 2 and from Stage 2 to Stage 1) Changes to ECL meas- urement model assump- tions and estimates Movements other than transfers and new originated or purchased loans Total movements with impact on credit loss allowance charge for the year Movements without impact on credit loss allowance charge for the year Unwinding of discount (for Stage 3) Write-offs Sales Modification of original cash flows without derecognition 217 - - 217 14,620 - (30) 236 - 206 (710) 710 - - (31) (41) 196 124 (151) (56) 207 1 (4) - (3) 28 (28) 4 2 - 6 - - - - 30 14,650 - - - - - - - - (104) (158) 17 (245) (3,689) (283) 23 18 (3,931) 57 35 213 305 10,098 343 230 48 10,719 - - - - - - - - 21 21 (151) (151) (11) (11) (8) (8) - - - - - - - - 21 (151) (11) - - - 21 (151) (11) (8) - (8) At 31 December 2019 298 190 569 1,057 24,031 1,053 658 198 25,940 At 31 December 2018 190 81 189 460 14,560 505 210 105 15,380 F-57 F-58 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 9 Loans and Advances to Customers (Continued) Credit loss allowance Gross carrying amount Stage 1 Stage 2 (12-months ECL) (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit im- paired) Stage 1 Stage 2 Stage 3 (12-months ECL) Total (lifetime ECL for SICR) (lifetime ECL for credit impaired) Total In millions of RR Car Loans At 31 December 2018 56 25 4 85 2,754 78 6 2,838 Movements with impact on credit loss allowance charge for the year: New originated or purchased 469 - - 469 18,238 - - 18,238 Transfers: - to lifetime (from Stage 1 to Stage 2) - to credit-impaired (from Stage 1 and Stage 2 to Stage 3) - to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) Changes to ECL measure- ment model assumptions and estimates Movements other than trans- fers and new originated or purchased loans Total movements with impact on credit loss allow- ance charge for the year Movements without impact on credit loss allowance charge the year Unwinding of discount (for Stage 3) Modification of original cash flows (98) 466 - 368 (1,087) 1,087 - (72) (23) 248 153 (320) (34) 354 1 (4) (1) - - - (3) 24 (24) (1) - - - - - - - - 13 (179) (1) (167) (884) (47) 2 (929) 312 260 247 819 15,971 982 356 17,309 - - - - 12 12 (3) (3) - - - - 12 12 (3) (3) At 31 December 2019 368 285 260 913 18,725 1,060 371 20,156 Credit loss allowance Gross carrying amount Stage 1 Stage 2 (12-months ECL) (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit im- paired) Stage 1 Stage 2 (12-months ECL) Total (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit im- paired) Total In millions of RR Car loans At 1 January 2018 - - - - - - - - Movements with impact on credit loss allowance charge for the year New originated or purchased 64 - - 64 2,839 - - 2,839 Transfers: - to lifetime (from Stage 1 to Stage 2) - to credit-impaired (from Stage 1 and Stage 2 to Stage 3) Movements other than trans- fers and new originated or purchased loans Total movements with impact on credit loss allow- ance charge for the year (7) 31 - 24 (80) 80 - (1) - 4 3 (6) - 6 - - - (6) 56 25 - 4 4 (6) 1 (2) - (1) 85 2,754 78 6 2,838 85 2,754 78 6 2,838 At 31 December 2018 56 25 F-59 F-60 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 9 Loans and Advances to Customers (Continued) Credit loss allowance Gross carrying amount Stage 1 Stage 2 (12-months ECL) (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit im- paired) Stage 1 Stage 2 Stage 3 (12-months ECL) Total (lifetime ECL for SICR) (lifetime ECL for credit impaired) Total 13 10 10 33 332 21 10 363 In millions of RR Loans to IE and SME At 31 December 2018 Movements with impact on credit loss allowance charge for the year: New originated or purchased 13 - - 13 301 - - 301 Transfers: - to lifetime (from Stage 1 to Stage 2) - to credit-impaired (from Stage 1 and Stage 2 to Stage 3) - to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) Movements other than transfers and new originated or purchased loans Total movements with impact on credit loss allowance charge for the year Movements without impact on credit loss allowance charge the year Unwinding of discount (for Stage 3) Modification of original cash flows (4) (8) - 26 (7) - - 22 44 29 (58) (39) - - 1 58 (8) (1) - 47 - - - - 43 (19) (13) 11 403 (49) (10) 344 44 - 31 75 608 - 37 645 - - - - 5 - 5 - - - - - 5 - 5 - At 31 December 2019 57 10 46 113 940 21 52 1,013 Loans to IE and SME At 1 January 2018 Movements with impact on credit loss allowance charge for the year New originated or purchased Transfers: - to lifetime (from Stage 1 to Stage 2) - to credit-impaired (from Stage 1 and Stage 2 to Stage 3) Movements other than transfers and new originated or purchased loans Total movements with impact on credit loss allowance charge for the year At 31 December 2018 - 8 (3) - - - 11 - - - - - 8 155 - - 8 (25) 25 - 10 10 (10) - - - - 155 - 10 - - 8 (1) - 7 212 (4) - 208 13 13 10 10 10 33 332 10 33 332 21 21 10 363 10 363 The credit loss allowance charge during the year ended 31 December 2019 presented in the tables above differs from the amount presented in the consolidated statement of profit or loss and other comprehensive income for the year due to RR 3,420 million (2018: RR 4,083 million) recovery of amounts previously written-off as uncollectible, and due to RR 201 million (2018: RR 318 million) charge of ECL for credit related commitments . The amount of the recovery from written-off loans received during the year was credited directly to the credit loss allowance line in the consolidated statement of profit or loss and other comprehensive income . The contractual amount outstanding of loans and advances to customers which were written off during the reporting period ended 31 December 2019 and are still subject to enforcement activity is equal to RR 10,095 million (reporting period ended 31 December 2018: RR 16,294 million) . The amount of the ECL for credit related commitments is accounted separately from ECL for credit cards loans and is included in other financial liabilities in the consolidated statement of financial position . During the year ended 31 December 2019 the Group sold credit-impaired loans to third parties (external debt collection agencies) with a gross amount of RR 1,205 million (2018: RR 454 million) and credit loss allowance of RR 1,123 million (2018: RR 425 million) . The difference between the carrying amount of these loans and the consideration received was recognised as losses in the amount of RR 73 million within credit loss allowance for loans and advances to customers and credit related commitments for the year ended 31 December 2019 (2018: losses in the amount of RR 7 million) . Presented below is an analysis of issued, activated and utilised cards based on their credit card limits as at the end of the reporting period: In units Credit card limits Up to 20 RR thousand 20-40 RR thousand 40-60 RR thousand 60-80 RR thousand 80-100 RR thousand 100-120 RR thousand 120-140 RR thousand 140-200 RR thousand More than 200 RR thousand Total number of cards (in units) 31 December 2019 31 December 2018 781,128 482,343 451,425 455,978 440,139 322,726 365,750 772,992 180,731 651,290 443,659 423,030 427,986 361,803 285,574 341,017 402,002 109,482 4,253,212 3,445,843 Table above only includes credit cards less than 180 days overdue . The following table contains an analysis of the credit risk exposure of loans and advances to customers measured at AC and for which an ECL allowance is recognised . The carrying amount of loans and advances to customers below also represents the Group's maximum exposure to credit risk on these loans . F-61 F-62 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 9 Loans and Advances to Customers (Continued) Loans and advances to customers at 31 December 2019 are disclosed as follows: In millions of RR (12-months ECL) Stage 1 Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit impaired) Purchased/ originated credit impaired Credit card loans - Excellent - Good - Monitor - Sub-standard - NPL Gross carrying amount Credit loss allowance Carrying amount Cash loans - Excellent - Good - Monitor - Sub-standard - NPL Gross carrying amount Credit loss allowance Carrying amount Secured Loans - Excellent - Good - Monitor - Sub-standard - NPL Gross carrying amount Credit loss allowance Carrying amount 87,716 102,020 8,060 - - 197,796 (11,704) 186,092 34,258 17,321 346 - - 51,925 (2,358) 49,567 19,941 7,319 106 - - 27,366 (150) 27,216 - 1,582 3,722 6,128 - 11,432 (6,853) 4,579 - 3,315 585 1,134 - 5,034 (1,882) 3,152 - 1,496 322 219 - 2,037 (264) 1,773 - - - 6,661 28,712 35,373 (25,572) 9,801 - - - 758 3,912 4,670 (3,789) 881 - - - - 198 198 (82) 116 Total 87,716 103,602 11,782 12,789 - - - - 336 29,048 336 244,937 - (44,129) 336 200,808 - - - - 636 636 34,258 20,636 931 1,892 4,548 62,265 - (8,029) 636 54,236 - - - - - - - - 19,941 8,815 428 219 198 29,601 (496) 29,105 Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit impaired) Purchased/ originated credit impaired In millions of RR POS loans - Excellent - Good - Monitor - Sub-standard - NPL Gross carrying amount Credit loss allowance Carrying amount Car loans - Excellent - Good - Monitor - Sub-standard - NPL Gross carrying amount Credit loss allowance Carrying amount Loans to IE and SME - Excellent - Good - Monitor - Sub-standard - NPL Gross carrying amount Credit loss allowance Carrying amount 19,525 4,406 100 - - 24,031 (298) 23,733 15,581 3,051 93 - - 18,725 (368) 18,357 622 314 4 - - 940 (57) 883 - 763 117 173 - 1,053 (190) 863 - 702 157 201 - 1,060 (285) 775 - 6 6 9 - 21 (10) 11 - - - 26 632 658 (569) 89 - - - - 371 371 (260) 111 - - - - 52 52 (46) 6 Total 19,525 5,169 217 199 830 25,940 - - - - 198 198 - (1,057) 198 24,883 - - - - - - - - - - - - - - - - 15,581 3,753 250 201 371 20,156 (913) 19,243 622 320 10 9 52 1,013 (113) 900 F-63 F-64 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 9 Loans and Advances to Customers (Continued) Loans and advances to customers at 31 December 2018 are disclosed as follows: Stage 1 In millions of RR (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit impaired) Purchased/ originated credit impaired 74,078 64,388 7,266 - - - 974 2,212 3,468 - - - - 4,774 20,723 Total 74,078 65,362 9,478 8,242 - - - - 107 20,830 Credit card loans - Excellent - Good - Monitor - Sub-standard - NPL Gross carrying amount 145,732 6,654 25,497 107 177,990 Credit loss allowance Carrying amount (9,266) 136,466 Cash loans - Excellent - Good - Monitor - Sub-standard - NPL Gross carrying amount Credit loss allowance Carrying amount POS loans - Excellent - Good - Monitor - Sub-standard - NPL Gross carrying amount Credit loss allowance Carrying amount 22,238 10,266 147 - - 32,651 (1,116) 31,535 10,293 4,206 61 - - 14,560 (190) 14,370 (4,708) 1,946 - 1,274 207 295 - 1,776 (545) 1,231 - 385 60 60 - 505 (81) 424 (19,322) 6,175 - (33,296) 107 144,694 - - - 72 695 767 (670) 97 - - - 6 204 210 (189) 21 - - - - 301 22,238 11,540 354 367 996 301 35,495 - (2,331) 301 33,164 - - - 105 10,293 4,591 121 66 309 105 15,380 - (460) 105 14,920 Stage 1 In millions of RR (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit im-paired) Purchased/ originated credit impaired Car loans - Excellent - Good - Monitor - Sub-standard - NPL Gross carrying amount Credit loss allowance Carrying amount Secured loans - Excellent - Good - Monitor Gross carrying amount Credit loss allowance Carrying amount Loans to IE and SME - Excellent - Good - Monitor - Sub-standard - NPL Gross carrying amount Credit loss allowance Carrying amount 1,876 866 12 - - 2,754 (56) 2,698 1,805 833 3 2,641 (15) 2,626 224 103 5 - - 332 (13) 319 - 42 16 20 - 78 (25) 53 - 1 2 3 (1) 2 - 6 9 6 - 21 (10) 11 - - - - 6 6 (4) 2 - - - - - - - - - - 10 10 (10) - - - - - - - - - - - - - - - - - - - - - - - Total 1,876 908 28 20 6 2,838 (85) 2,753 1,805 834 5 2,644 (16) 2,628 224 109 14 6 10 363 (33) 330 Stage 3 includes restructured loans that are less than 90 days overdue which are not considered as NPL according to the Group’s credit risk grading master scale . Refer to Note 31 for the description of credit risk grading system used by the Group . Loans in courts are included in Stage 3 and are loans to delinquent borrowers, against which the Group has filed claims to courts in order to recover outstanding balances . As at 31 December 2019 the gross carrying amount of the loans in courts was RR 22,228 million (31 December 2018: RR 15,531 million) . F-65 F-66 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 9 Loans and Advances to Customers (Continued) Description of collateral held for loans to individuals carried at amortised cost is as follows at 31 December 2019: In millions of RR Loans collateralised by: - residential real estate - cars Total Unsecured exposures Total gross carrying amount (representing exposure to credit risk for each class of loans at AC) Secured loans Car loans Total 27,437 1,904 29,341 260 - 15,256 15,256 4,900 27,437 17,160 44,597 5,160 29,601 20,156 49,757 Description of collateral held for loans to individuals carried at amortised cost is as follows at 31 December 2018: In millions of RR Loans collateralised by: - residential real estate - cars Total Unsecured exposures Total gross carrying amount (representing exposure to credit risk for each class of loans at AC) Secured loans Car loans Total 2,449 189 2,638 6 2,644 - 2,095 2,095 743 2,838 2,449 2,284 4,733 749 5,482 The disclosure above represents the lower of the carrying value of the loan or collateral taken; the remaining part is disclosed within the unsecured exposures which arise mainly due to application of a discount in determining the carrying value of collat- eral . The extent to which collateral and other credit enhancements mitigate credit risk for financial assets carried at amortised cost that are credit impaired, is presented by disclosing collateral values separately for (i) those assets where collateral and other credit enhancements are equal to or exceed carrying value of the asset (“over-collateralised assets”) and (ii) those assets where collateral and other credit enhancements are less than the carrying value of the asset (“under-collateralised assets”) . The effect of collateral on credit impaired assets at 31 December 2019 is as follows . In millions of RR Credit impaired assets: Secured loans Car loans Over-collateralised assets Under-collateralised assets Gross carrying amount of the assets Value of collateral Gross carrying amount of the assets Value of collateral 194 25 442 31 4 346 2 208 The effect of collateral on credit impaired assets at 31 December 2018 is as follows . In millions of RR Credit impaired assets: Secured loans Car loans Over-collateralised assets Under-collateralised assets Gross carrying amount of the assets Value of collateral Gross carrying amount of the assets Value of collateral - - - - - 6 - 4 The values of collateral considered in this disclosure are after a valuation haircut of 20% (2018: 20%) for residential real estate and 30% (2018: 30%) for cars applied to consider liquidity and quality of the pledged assets . All contractual modifications of loans with the lifetime ECL that did not lead to derecognition did not have gains less losses on modification recognised in profit or loss for the year ended 31 December 2019 (2018: same) . Refer to Note 38 for the disclosure of the fair value of loans and advances to customers . Interest rate, maturity and geographi- cal risk concentration analysis are disclosed in Note 31 . Information on related party balances is disclosed in Note 40 . 10 Investments in Securities In millions of RR Debt securities measured at fair value through other comprehensive income Securities measured at fair value through profit or loss Total investments in securities 1) Debt securities measured at fair value through other comprehensive income The table below discloses investments in debt securities measured at FVOCI by classes: In millions of RR Corporate bonds Russian government bonds Municipal bonds Total debt securities measured at FVOCI Including credit loss allowance 31 December 2019 31 December 2018 134,765 413 94,474 5,666 135,178 100,140 31 December 2019 31 December 2018 72,032 56,382 6,351 65,140 23,560 5,774 134,765 94,474 345 481 F-67 F-68 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 10 Investments in Securities (Continued) 1) Debt securities measured at fair value through other comprehensive income (Continued) The table below contains an analysis of the credit risk exposure of debt securities measured at FVOCI at 31 December 2019, for which an ECL allowance is recognised, based on credit risk grades: In millions of RR Corporate bonds - Excellent - Good - Monitor Total AC gross carrying amount Credit loss allowance Fair value adjustment from AC to FV Carrying value Russian government bonds - Good Total AC gross carrying amount Credit loss allowance Fair value adjustment from AC to FV Carrying value Municipal bonds - Good - Monitor Total AC gross carrying amount Credit loss allowance Fair value adjustment from AC to FV Carrying value Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit im-paired) 411 61,042 8,192 69,645 (225) 2,612 72,032 54,471 54,471 (99) 2,010 56,382 5,663 422 6,085 (21) 287 6,351 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Total 411 61,042 8,192 69,645 (225) 2,612 72,032 54,471 54,471 (99) 2,010 56,382 5,663 422 6,085 (21) 287 6,351 1) Debt securities measured at fair value through other comprehensive income (Continued) The table below contains an analysis of the credit risk exposure of debt securities measured at FVOCI at 31 December 2018, for which an ECL allowance is recognised, based on credit risk grades: In millions of RR Corporate bonds - Excellent - Good - Monitor - Sub-standard - Doubtful Total AC gross carrying amount Credit loss allowance Fair value adjustment from AC to FV Carrying value Russian government bonds - Good Total AC gross carrying amount Credit loss allowance Fair value adjustment from AC to FV Carrying value Municipal bonds - Good - Monitor Total AC gross carrying amount Credit loss allowance Fair value adjustment from AC to FV Carrying value Stage 1 (12-months ECL) Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit im-paired) 896 53,664 10,304 14 - 64,878 (255) (511) 64,112 24,021 24,021 (63) (398) 23,560 4,325 1,508 5,833 (35) (24) 5,774 - 1,413 - 194 1,607 (128) (451) 1,028 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Total 896 53,664 11,717 14 194 66,485 (383) (962) 65,140 24,021 24,021 (63) (398) 23,560 4,325 1,508 5,833 (35) (24) 5,774 Refer to Note 31 for the description of credit risk grading system used by the Group and the approach to ECL measurement, including the definition of default and SICR as applicable to debt securities at FVOCI The debt securities at FVOCI are not collateralised . F-69 F-70 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 10 Investments in Securities (Continued) 1) Debt securities measured at fair value through other comprehensive income (Continued) The following table explains the changes in the credit loss allowance (including those pledged under repurchase agreements) and gross carrying amount for debt securities at FVOCI for the year ended 31 December 2019: Credit loss allowance Gross carrying amount Stage 1 Stage 2 (12-months ECL) (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit im- paired) Stage 1 Stage 2 (12-months ECL) Total (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit im- paired) Total In millions of RR Corporate bonds At 1 January 2019 255 128 - 383 64,951 1,607 - 66,558 Movements with impact on credit loss allowance charge: New originated or purchased Transfers: - to lifetime (from Stage 1 to Stage 2) Foreign exchange losses Redemption during the year Disposal during the year Interest income accrued Interest received Other movements Total movements with impact on credit loss allowance charge At 31 December 2019 89 - - 89 25,936 - - 25,936 24 (26) - (2) 1,318 (1,318) - - - (18) (2,702) (96) - (2,798) (12) (12) (91) 12 (12) (28) (6) - (40) 4 (4) (56) - (131) (16,348) (193) - (16,541) - - - 16 4,074 (16) (84) (3,975) - 43 (43) - - - - 4,117 (4,018) - (30) (128) - (158) 4,694 (1,607) - 3,087 225 - - 225 69,645 - - 69,645 1) Debt securities measured at fair value through other comprehensive income (Continued) Credit loss allowance Gross carrying amount Stage 1 Stage 2 (12-months ECL) (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit im- paired) Stage 1 Stage 2 (12-months ECL) Total (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit im- paired) Total In millions of RR Russian government bonds At 1 January 2019 66 Movements with impact on credit loss allowance charge: New originated or purchased 167 Foreign exchange losses Redemption during the year Disposal during the year Interest income accrued Interest received Other movements Total movements with impact on credit loss allowance charge At 31 December 2019 (2) (63) (53) 4 (4) (16) 33 99 - - - - - - - - - - - 66 25,190 - - - - - - - - - 167 81,179 (2) (63) (53) 4 (4) (16) (833) (30,858) (20,414) 2,119 (1,912) - 33 29,281 99 54,471 - - - - - - - - - - - 25,190 - - 81,179 (833) - (30,858) - (20,414) - - - 2,119 (1,912) - - 29,281 - 54,471 Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total (lifetime ECL for SICR) (lifetime ECL for credit im- paired) (lifetime ECL for SICR) (lifetime ECL for credit im- paired) (12-months ECL) (12-months ECL) In millions of RR Municipal bonds At 1 January 2019 35 Movements with impact on credit loss allowance charge: New originated or purchased Redemption during the year Disposal during the year Interest income accrued Interest received Other movements Total movements with impact on credit loss allowance charge At 31 December 2019 3 (1) (4) 2 (3) (11) (14) 21 - - - - - - - - - - 35 5,833 - - - - - - 3 (1) (4) 2 (3) (11) 968 (482) (216) 469 (487) - - (14) 252 - 21 6,085 - - - - - - - - - - 5,833 - - - - - - 968 (482) (216) 469 (487) - - 252 - 6,085 - (12) (3,609) - - (3,609) Credit loss allowance Gross carrying amount F-71 F-72 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 10 Investments in Securities (Continued) 1) Debt securities measured at fair value through other comprehensive income (Continued) The following table explains the changes in the credit loss allowance and gross carrying amount for debt securities at FVOCI for the year ended 31 December 2018: Credit loss allowance Gross carrying amount Stage 1 Stage 2 Stage 3 Stage 1 Stage 2 Stage 3 (lifetime ECL for SICR) (lifetime ECL for credit impaired) (12-months ECL) (12-months ECL) Total (lifetime ECL for SICR) (lifetime ECL for credit impaired) Total In millions of RR Corporate bonds At 1 January 2018 216 17 - 233 46,663 270 - 46,933 Movements with impact on credit loss allowance charge: New originated or purchased 184 - - 184 27,235 - - 27,235 Transfers: - to lifetime (from Stage 1 to Stage 2) Foreign exchange gains Redemption during the year Disposal during the year Interest income accrued Interest received Other movements (15) 12 (6) (41) 15 (16) (94) 71 17 - - 9 (7) 21 Total movements with impact on credit loss allowance charge 39 111 At 31 December 2018 255 128 Russian government bonds At 1 January 2018 36 Movements with impact on credit loss allowance charge: New originated or purchased Foreign exchange gains Redemption during the year Disposal during the year Interest income accrued Interest received Total movements with impact on credit loss allowance charge At 31 December 2018 189 3 (128) (33) 4 (5) 30 66 - - - - - - - - - - - - - - - - - - 56 29 (6) (41) 24 (23) (73) (1,082) 1,082 3,039 228 (1,040) (9,856) 3,893 (3,901) - - - 80 (53) - - - - - - - - - 3,267 (1,040) (9,856) 3,973 (3,954) - 150 18,288 1,337 - 19,625 383 64,951 1,607 - 66,558 - 36 13,686 - - - - - - - - 189 73,217 3 1,108 (128) (49,829) (33) (12,649) 4 (5) 1,398 (1,741) 30 11,504 66 25,190 - - - - - - - - - - 13,686 - - - - - - 73,217 1,108 (49,829) (12,649) 1,398 (1,741) - 11,504 - 25,190 1) Debt securities measured at fair value through other comprehensive income (Continued) Credit loss allowance Gross carrying amount Stage 1 Stage 2 (12-months ECL) (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit impaired) Stage 1 Stage 2 (12-months ECL) Total (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit impaired) Total In millions of RR Municipal bonds At 1 January 2018 23 - - 23 4,308 Movements with impact on credit loss allowance charge: New originated or purchased Disposal during the year Interest income accrued Interest received Other movements Total movements with impact on credit loss allowance charge At 31 December 2018 16 (1) 2 (2) (3) 12 35 - - - - - - - - - - - - 16 1,752 (1) 2 (2) (3) (240) 382 (369) - - 12 1,525 - 35 5,833 - - - - - - - - - 4,308 - - - - - 1,752 (240) 382 (369) - - 1,525 - 5,833 2) Securities measured at fair value through profit or loss The table below discloses investments in securities measured at FVTPL by classes: In millions of RR Perpetual corporate bonds Other securities Total securities measured at FVTPL 31 December 2019 31 December 2018 - 413 413 5,666 - 5,666 Other securities are represented by assets of the mutual fund which are controlled by the Group and managed by LLC “Tinkoff Capital” . As at 31 December 2019 securities measured at FVTPL are carried at fair value, which also reflects any credit risk related write-downs and best represents Group’s maximum exposure to credit risk . The securities measured at FVTPL are not collater- alized (2018: same) . Interest rate, maturity and geographical risk concentration analysis of investment in securities are disclosed in Note 31 . F-73 F-74 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 11 Guarantee Deposits with Payment Systems As at 31 December 2019 and 2018 guarantee deposits were placed in favour of MasterCard with Barclays Bank Plc London (A rated), in favour of Visa with United Overseas Bank Ltd Singapore (AA-rated), and in favour of Russia payment card Mir with Russian National payment card system (NSPK) . As at 31 December 2019 the carrying value of guarantee deposits with payment systems was RR 8,877 million (2018: RR 4,603 million) . The table below discloses the credit quality of guarantee deposits with payment systems balances based on credit risk grades: In millions of RR - Excellent - Good Total guarantee deposits with payment systems 31 December 2019 31 December 2018 8,376 501 8,877 4,435 168 4,603 The carrying amount of guarantee deposits with payment systems at 31 December 2019 and 2018 also represents the Group's maximum exposure to credit risk on these assets . Refer to Note 31 for the description of credit risk grading system used by the Group . For the purpose of ECL measurement guarantee deposits with payment systems balances are included in Stage 1 . Guarantee deposits with payment systems are unsecured financial assets . The ECL for these balances represents an immaterial amount, therefore the Group did not create any credit loss allowance for guarantee deposits with payment systems . Refer to Note 31 for the ECL measurement approach . Interest rate, maturity and geographical risk concentration analysis are disclosed in Note 31 . 12 Tangible Fixed Assets, Intangible Assets, and Right-of-use Assets In millions of RR Land Building Cost Equip- ment Leasehold im- prove-ments Vehicles Total tan- gible fixed assets Intangible assets At 31 December 2017 396 4,088 2,420 Additions Disposals - - 131 2,131 - (210) 747 789 - At 31 December 2018 396 4,219 4,341 1,536 Additions Disposals - - - - 1,788 (59) 86 (2) At 31 December 2019 396 4,219 6,070 1,620 Depreciation and amortisation At 31 December 2017 Charge for the year (Note 25) Disposals At 31 December 2018 Charge for the year (Note 25) Disposals At 31 December 2019 Net book value - - - - - - - (48) (42) - (90) (43) (1,042) (695) 210 (1,527) (1,076) - 9 (133) (2,594) (434) (81) - (515) (160) 2 (673) 41 1 - 42 46 - 88 7,692 3,052 (210) 4,559 2,066 - 10,534 6,625 1,920 2,564 (61) (72) 12,393 9,117 (28) (1,552) (1,503) (5) - (823) 210 (899) - (33) (2,165) (2,402) (8) - (1,287) (1,331) 11 51 (41) (3,441) (3,682) At 31 December 2018 396 4,129 2,814 At 31 December 2019 396 4,086 3,476 1,021 947 9 47 8,369 4,223 8,952 5,435 Intangible assets additions in the amount of RR 1,212 million related to capitalised the software developments by Tinkoff Soft- ware DC during the year ended 31 December 2019 (2018: RR 774 million) . Other intangible assets acquired during the year ended 31 December 2019 and 2018 mainly represent accounting software, retail banking software, insurance software, licenses and development of software . During 2019 the Group acquired no office building space (2018: RR 131 million, VAT included) . Right-of-use assets and lease liabilities. Right-of-use-assets represented above relate to the office premises leased by the Group . Rental contracts are typically for fixed periods from 1 to 5 years . The group does not have extension or termination options of its lease agreements other than lease agreements of low value items . The right of use assets by class of underlying items is analysed as follows: In millions of RR Carrying amount at 1 January 2019 Additions Depreciation charge (Note 25) Carrying amount at 31 December 2019 Office premises 1,671 1,071 (1,134) 1,608 Prior to 1 January 2019 Group’s leases of premises and equipment were classified as operating leases . From 1 January 2019, leases are recognised as a right-of-use asset and a corresponding liability from the date when the leased asset becomes avail- able for use by the Group . Expenses relating to leases of low-value assets in the amount of RR 390 million are included in administrative and other oper- ating expenses (Note 25) . Total cash outflow for leases during the year ended 31 December 2019 was RR 1,087 million . 13 Other Financial and Non-financial Assets In millions of RR Other Financial Assets Settlement of operations with plastic cards Other Total Other Financial Assets Other Non-Financial Assets Prepaid expenses Other Total Other Non-Financial Assets 31 December 2019 31 December 2018 16,384 5,289 21,673 1,223 1,287 2,510 12,694 2,948 15,642 2,360 664 3,024 Settlement of operations with plastic cards represents balances due from payment agents in respect of payments made by borrowers to reimburse credit card loans and to be settled within 3 days . This amount includes prepayment to the payment systems for operations during holiday period . At 31 December 2019, included in other financial assets are receivables, investments in associates and subrogation rights (2018: same) . F-75 F-76 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 13 Other Financial and Non-financial Assets (Continued) As at 31 December 2019 and 2018 prepaid expenses consist of prepayments for marketing, IT support, security, TV advertis- ing and ATM-service . The table below discloses the credit quality of other financial assets based on credit risk grades: In millions of RR - Excellent - Good Total other financial assets 31 December 2019 31 December 2018 9,219 12,454 21,673 7,430 8,212 15,642 Refer to Note 31 for the description of the Group’s credit risk grading system . For the purpose of ECL measurement settlement of operations with plastic cards balances and other receivables are included in Stage 1 . The ECL for these balances represents an immaterial amount, therefore the Group did not recognise any credit loss al- lowance . Refer to Note 31 for the ECL measurement approach . Refer to Note 38 for the disclosure of the fair value of other finan- cial assets . The maturity and geographical risk concentration analysis of amounts of other financial assets is disclosed in Note 31 . 14 Due to Banks In millions of RR Sale and repurchase agreements with other banks Correspondent accounts and overnight placements of other banks Total due to banks 31 December 2019 31 December 2018 640 23 663 1,111 1,597 2,708 Refer to Note 38 for the disclosure of the fair value of amounts due to banks . Interest rate, maturity and geographical risk con- centration analysis of due to banks is disclosed in Note 31 . Refer to Note 34 and 35 for information on the amounts included in due to banks received under sale and repurchase agreements and fair value of securities pledged . 16 Debt Securities in Issue In millions of RR Date of maturity 31 December 2019 31 December 2018 RR denominated bonds issued in April 2019 21 March 2029 RR denominated bonds issued in September 2019 12 September 2029 RR denominated bonds issued in April 2017 22 April 2022 EUR denominated ECP issued in December 2019 20 November 2020 RR denominated bonds issued in June 2016 24 June 2021 EUR denominated ECP issued in February 2019 18 February 2020 USD denominated ECP issued in December 2019 20 November 2020 EUR denominated ECP issued in December 2018 19 December 2019 USD denominated ECP issued in December 2018 19 December 2019 RR denominated ECP issued in December 2018 19 December 2019 Total debt securities in issue 10,158 10,157 2,468 1,030 835 831 599 - - - 26,078 - - 5,067 - 784 - - 2,392 1,266 96 9,605 On 3 April 2019 the Bank issued RR denominated bonds with a nominal value of RR 10,000 million at 9 .25% coupon rate maturing on 21 March 2029 . On 25 September 2019 the Bank issued RR denominated bonds with a nominal value of RR 10,000 million at 8 .25% coupon rate maturing on 12 September 2029 . On 28 April 2017 the Bank issued RR denominated bonds with a nominal value of RR 5,000 million at 9 .65% coupon rate maturing on 22 April 2022 . On 30 June 2016 the Group issued RR denominated bonds with a nominal value of RR 3,000 million at 11 .7% coupon rate maturing on 24 June 2021 . On 20 December 2019 the Group issued two tranches of Euro-Commercial Paper (ECP) denominated in USD and EUR maturing on 20 November 2020 . USD denominated ECP has a nominal value of USD 10 million with a discount of 3 .6% . EUR denominat- ed ECP has a nominal value of EUR 15 million with a discount of 1 .0% . 15 Customer Accounts In millions of RR Individuals - Current/demand accounts - Term deposits IE and SME - Current/demand accounts - Term deposits Other legal entities - Current/demand accounts - Term deposits Total customer accounts Note 31 December 2019 31 December 2018 On 19 February 2019 the Group issued Euro-Commercial Paper (ECP) denominated in EUR maturing on 18 February 2020 . EUR denominated ECP has a nominal value of EUR 12 million with a discount of 1 .25% . 30 30 211,661 137,292 137,637 100,227 60,174 1,880 495 112 41,702 - 552 798 411,614 280,916 On 20 December 2018 the Group issued three tranches of Euro-Commercial Paper (ECP) denominated in USD, EUR and RR maturing on 19 December 2019 . USD denominated ECP has a nominal value of USD 19 million with a discount of 4 .25% . EUR denominated ECP has a nominal value of EUR 30 .5 million with a discount of 1 .25% . RR denominated ECP has a nominal value of RR 105 million with a discount of 9 .5% . The Group redeemed all outstanding ECP of this issue at maturity . All RR denominated bonds issued by the Bank are traded on the Moscow Exchange . Refer to Note 38 for the disclosure of the fair value of debt securities in issue . Interest rate, maturity and geographical risk concentration analysis of debt securities in issue are disclosed in Note 31 . Refer to Note 38 for the disclosure of the fair value of customer accounts . Interest rate, maturity and geographical risk con- centration analysis of customer accounts amounts is disclosed in Note 31 . Information on related party balances is disclosed in Note 40 . F-77 F-78 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 17 Subordinated Debt As at 31 December 2019 the carrying value of the subordinated debt was RR 18,487 million (31 December 2018: RR 20,644 million) . On 15 June 2017 the Group issued perpetual subordinated loan participation notes with a nominal value of USD 300 million with zero premium . The notes have no stated maturity . The Group has a right to repay the notes at its discretion starting from 15 September 2022 and they are repayable in case of certain events other than liquidation . The notes bear a fixed interest rate of 9 .25% p .a . payable quarterly starting from 15 September 2017 . Interest payments may be cancelled by the Group at any time . The claims of lenders against the Group in respect of the principal and interest on these bonds are subordinated to the claims of other creditors in accordance with the legislation of the Russian Federation . The perpetual subordinated loan participation notes are traded on the Global Exchange Market . Interest rate, maturity and geographical risk concentration analysis of subordinated debt is disclosed in Note 31 . Refer to Note 38 for the disclosure of the fair value of financial instruments . 18 Insurance Provisions In millions of RR Insurance Provisions Provision for unearned premiums Loss provisions Total Insurance Provisions 31 December 2019 31 December 2018 3,938 2,342 6,280 1,760 1,099 2,859 Movements in provision for unearned premiums for the year ended 31 December 2019 and 2018 are as follows: 2019 Gross provi- sion Reinsurer’s share of pro- vision Provision net of reinsur- ance Gross provi- sion 2018 Reinsurer’s share of pro- vision Provision net of reinsurance 1,760 2,178 - (3) - (8) 1,757 2,178 1,117 643 (8) - 3,938 (11) 3,927 1,760 (1) - (2) (3) 1,116 643 (2) 1,757 In millions of RR Provision for unearned premiums as at 1 January Change in provision, gross Change in reinsurers’ share of provision Provision for unearned premiums as at 31 De- cember Movements in loss provisions for the year ended 31 December 2019 and 2018 are as follows: In millions of RR Note OCP and IBNR Loss provisions as at 1 January 2018 Losses incurred in the current reporting period Changes in OCP and IBNR provisions related to prior periods losses Insurance claims paid Claims handling expenses accrued Claims handling expenses paid Unexpired risk provision charge Unexpired risk provision written off Loss provisions as at 31 December 2018 Losses incurred in the current reporting period Changes in OCP and IBNR provisions related to prior periods losses 24 24 518 1,921 (61) (1,413) - - - - 965 4,026 (138) Insurance claims paid 24 (2,923) Claims handling expenses accrued Claims handling expenses paid 24 Unexpired risk provision charge Unexpired risk provision written off - - - - Loss provisions as at 31 December 2019 1,930 Provision for claims handling expenses Total loss provisions 82 - (28) - 372 (301) - - 125 - (39) 862 (733) - - 683 1,921 (89) (1,413) 372 (301) (65) (9) 1,099 4,026 (177) (2,923) 862 (733) 253 (65) 215 2,342 URP 83 - - - - - (65) (9) 9 - - - - - 253 (65) 197 19 Other Financial and Non-financial Liabilities In millions of RR 31 December 2019 31 December 2018 Other financial liabilities Settlement of operations with plastic cards Trade payables Credit related commitments (Note 33) Other Total other financial liabilities Other non-financial liabilities Lease liabilities Taxes payable other than income tax Accrued administrative expenses Other Total other non-financial liabilities 6,427 4,621 2,242 1,358 14,648 1,694 1,321 1,277 582 4,874 4,904 3,189 2,041 1,067 11,201 - 1,212 1,438 791 3,441 F-79 F-80 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 19 Other Financial and Non-financial Liabilities (Continued) Settlements of operations with plastic cards include funds that were spent by customers of the Bank by usage of plastic cards but have not yet been compensated to payment systems by the Bank . Accrued administrative expenses are mainly represented by accrued staff costs . Interest expense on lease liabilities was RR 134 million during 2019 (Note 21) . Movements in the credit loss allowance for credit related commitments were as follows for the year ended 31 December 2019: In millions of RR (12-months ECL) (lifetime ECL for SICR) (lifetime ECL for credit im-paired) Gross committed amount Stage 1 Stage 2 Stage 3 At 31 December 2018 2,024 17 Movements with impact on provision for credit related commitments charge for the year: New originated or purchased Transfers: - to lifetime (from Stage 1 to Stage 2) - to credit-impaired (from Stage 1 and Stage 2 to Stage 3) - to 12-months ECL (from Stage 2 and Stage 3 to Stage 1) Changes to ECL measurement model assumptions and estimates Movements other than transfers and new originated or purchased loans Total charge to profit or loss for the year At 31 December 2019 840 (23) (45) 5 (163) (410) 204 2,228 - 9 (7) (15) - 10 (3) 14 - - - - - - - - - 2,041 840 (14) (52) (10) (163) (400) 201 2,242 Movements in the credit loss allowance for credit related commitments were as follows for the year ended 31 December 2018: In millions of RR At 1 January 2018 Movements with impact on credit loss allowance for credit related commitments charge for the year: New originated or purchased Transfers: - to lifetime (from Stage 1 to Stage 2) - to credit-impaired (from Stage 1 and Stage 2 to Stage 3) - recovered (from Stage 3 to Stage 2 and from Stage 2 to Stage 1) Movements other than transfers and new origi- nated or purchased loans Total movements with impact on credit loss allowance for credit related commitments charge for the year At 31 December 2018 Stage 1 Stage 2 Stage 3 (12-months ECL) (lifetime ECL for SICR) (lifetime ECL for credit im-paired) 1,701 22 893 (23) (53) - 18 (7) 5 (16) (499) 323 2,024 - (5) 17 - - - - - - - - Total 1,723 893 (5) (60) (11) (499) 318 2,041 The main movements in the table presented above are described as follows: • new originated or purchased category represents the day one 12-month ECL for the undrawn part of the purchased loans and loans to new borrowers (for this particular product) before the first payment became due; • transfers between Stage 1, 2 and 3 due to undrawn limits experiencing significant increases (or decreases) of credit risk or becoming credit-impaired in the period, and the consequent “step up” (or “step down”) between 12-month and Lifetime ECL . Transfers present the amount of credit loss allowance for loan commitments charged or recovered at the moment of transfer of a loan commitment among the respective stages; • movements other than transfers and new originated or purchased loans category represents all other movements of ECL for loan commitments in particular related to changes in gross carrying amounts of associated loans, ECL model assump- tions and other . Interest rate, maturity and geographical risk concentration analysis of other financial liabilities is disclosed in Note 31 . Refer to Note 38 for disclosure of fair value of other financial liabilities . Refer to Note 33 for analysis of loan commitments by credit risk grades . F-81 F-82 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019  372 372 Diluted earnings per ordinary share (expressed in RR per share) - - 18,916 (499) Information on dividends is disclosed in Note 28 . Reconciliation of the number of shares used for basic and diluted EPS: Earnings per share are calculated as follows: In millions of RR except for the number of shares Profit for the year attributable to ordinary shareholders of the Company Weighted average number of ordinary shares in issue used for basic earnings per ordinary share calculation (thousands) Weighted average number of ordinary shares in issue used for diluted earnings per ordinary share calculation (thousands) Basic earnings per ordinary share (expressed in RR per share) 2019 36,122 2018 27,088 186,559 176,425 190,070 182,070 193.62 190.05 153.54 148.78 In thousands Note 2019 2018 Weighted average number of ordinary shares in issue used for basic earnings per ordinary share calculation Number of shares attributable for MLTIP Number of shares transferred out of treasury shares upon vesting under the MLTIP to retained earnings or forfeited Number of shares that would have been issued at fair value Weighted average number of ordinary shares in issue used for diluted earnings per ordinary share calculation 40 40 186,559 176,425 9,940 9,849 (6,158) (271) (3,671) (533) 190,070 182,070 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 20 Share Capital In millions of RR except for the number of shares Number of authorised shares Number of outstanding shares Ordinary shares Share pre- mium Treasury shares Total At 1 January 2018 190,479,500 182,638,825 188 8,623 (1,587) 7,224 Increase of authorized shares 1,291,266 GDRs buy-back GDRs and shares transferred under MLTIP - - - - - - - - - (2,455) (2,455) At 31 December 2018 191,770,766 182,638,825 188 8,623 (3,670) 5,141 Shares issued 18,263,882 16,666,667 42 18,874 Secondary public offering costs GDRs and shares transferred under MLTIP - - - - - - (499) - 506 506 At 31 December 2019 210,034,648 199,305,492 230 26,998 (3,164) 24,064 During three months ended 31 March 2019 Altoville Holdings Limited converted 6,385,310 Class B shares into Class A (on a one-to-one basis), which was 3 .49% of its share, and then sold them to the market . On 2 July 2019 the Group completed a SPO on the London Stock Exchange plc . and issued 16,666,667 “Class A” shares of the Company in the form of GDRs at a price of USD 18 .00 per GDR, raising aggregate gross proceeds of USD 300 million (RR 18,916 million) . All issued ordinary shares are fully paid . All the incurred SPO costs were primary direct expenses accounted within share premium . At 31 December 2019 the total number of outstanding shares is 199,305,492 shares (2018: 182,638,825 shares) with a par value of USD 0 .04 per share (2018: USD 0 .04 per share) . In June 2019 the Company’s shareholders approved a resolution to increase authorised share capital to USD 8,401,385 .92 by the creation of 18,263,882 new undesignated ordinary shares of nominal value USD 0 .04 each . At 31 December 2019 the total number of authorised shares is 210,034,648 shares (2018: 191,770,766 shares) with a par value of USD 0 .04 per share (2018: USD 0 .04 per share) . As at 31 December 2019 and 2018 treasury shares represent GDRs of the Group repurchased from the market for the purpos- es permitted by Cyprus law including contribution to MLTIP . Refer to Note 40 . At 31 December 2019 the total number of treasury shares is 4,185,166 (2018: 6,604,353) . During the year ended 31 December 2019 no GDRs were repurchased by the Group (2018: 2,094,126 GDRs at market price for RR 2,455 million) . Basic earnings per share are calculated by dividing the profit or loss attributable to owners of the Company by the weighted average number of ordinary shares in issue during the year, excluding treasury shares . For the purpose of calculating diluted earnings per share the Group considered the dilutive effect of share options granted under MLTIP . F-83 F-84 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 Note 2019 2018 22 Fee and Commission Income and Expense In millions of RR 2019 2018 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 21 Net Margin In millions of RR Interest income calculated using the effective interest rate method Loans and advances to customers, including: Credit card loans Cash loans POS loans Secured loans Car loans Loans to IE and SME Debt securities and repurchase receivables at FVOCI Placements with other banks and non-bank credit organizations with origi- nal maturities of less than three months Total Interest income calculated using the effective interest rate method Other similar income Debt securities and repurchase receivables at FVTPL Total interest income Interest expense calculated using the effective interest rate method Customer accounts, including: Individuals - Current/demand accounts - Term deposits IE and SME Other legal entities Subordinated debt RR denominated bonds Due to banks Euro-Commercial Paper 83,352 11,878 3,452 2,285 1,512 325 6,705 64,446 4,029 1,454 41 38 68 5,753 463 440 109,972 76,269 118 110,090 456 76,725 30 8,988 7,006 1,421 40 1,846 1,282 634 100 5,963 5,283 1,212 90 2,089 706 92 124 Total Interest expense calculated using the effective interest rate method 21,317 15,559 Other similar expense Lease liabilities Total interest expense Expenses on deposit insurance Net margin 134 21,451 1,870 86,769 - 15,559 1,174 59,992 Fee and commission income IE and SME current accounts commission Acquiring commission Fee for selling credit protection Interchange fee SMS fee Foreign currency exchange transactions fee Card to card commission Income from MVNO services Brokerage operations Cash withdrawal fee Marketing services fee Placement fee Mortgage agency fee Other fees receivable 8,483 6,616 5,550 3,473 3,244 3,024 1,980 890 819 720 340 141 136 626 6,943 4,162 5,601 3,046 2,256 1,785 1,279 186 210 885 108 167 419 376 Total fee and commission income 36,042 27,423 IE and SME current accounts commission represents commission for services to individual entrepreneurs and small to medium businesses . Fee for selling credit protection represents fee which the Bank receives for selling voluntary credit insurance to borrowers of the Group . Acquiring commission represents commission for processing card payments from online and offline points of sale . Income from MVNO services represents income from providing mobile services such as full coverage across Russia and international roaming, offering a number of value-added options such as virtual numbers, music and video stream- ing services, etc . In millions of RR Fee and commission expense Payment systems Service fees Payment channels Costs of MVNO services Banking and other fees 2019 2018 12,745 2,043 1,327 910 423 8,430 1,429 1,209 246 456 Total fee and commission expense 17,448 11,770 Payment systems fees represent fees for MasterCard, Visa and other payment systems’ services . Service fees represent fees for statement printing, mailing service, sms services and others . Payment channels represent fees paid to third parties though whom borrowers make loan repayments . Costs of MVNO services represent expenses for the traffic, telecommunications service and roaming . Refer to Note 3 that describes the types of revenues recognized on a point in time basis and on the over time basis . F-85 F-86 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 23 Customer Acquisition Expense In millions of RR Marketing and advertising Staff costs Taxes other than income tax Partnership expenses Credit bureaux Cards issuing expenses Telecommunication expenses Other acquisition 2019 8,106 5,916 1,413 979 697 411 326 329 2018 5,672 5,509 1,107 768 535 260 285 86 Total customer acquisition expenses 18,177 14,222 Customer acquisition expenses represent expenses paid by the Group on services related to origination of customers which are not directly attributable to the recognised assets and are not incremental . The Group uses a variety of different channels for the acquisition of new customers . Staff costs represent salary expenses and related costs of employees directly involved in customer acquisition . Included in staff costs are statutory social contributions to the state non-budgetary funds in the amount of RR 1,561 million for the year ended 31 December 2019 (2018: RR 1,341 million) . 24 Insurance Premiums Earned and Claims Incurred In millions of RR 2019 Insurance premiums earned Insurance premiums on insurance, co-insurance and reinsurance operations Change in provision for unearned premiums Reinsurers' share Total Insurance premiums earned Insurance claims incurred Insurance claims on insurance, co-insurance and reinsurance operations Changes in loss provisions Claims handling expenses Reinsurers' share 16,289 (2,178) (1) 14,110 (2,923) (1,243) (733) 8 2018 7,315 (643) 2 6,674 (1,413) (416) (301) 4 Total Insurance claims incurred (4,891) (2,126) The Insurance company provides following types of insurance: Personal accident insurance and collective insurance against accidents, illnesses or loss of work provides compensation and financial protection in the event of injuries, disability, death or loss of loss of work of the borrower . It is different from life insurance and med- ical and health insurance . In accordance with the terms of individual insurance contracts, the policyholder and beneficiary is an indi- vidual who has entered into an insurance contract . In accordance with the terms of the collective insurance contract, the insurer is the Bank that has concluded the collective insurance contract with the Insurance Company, the beneficiary is the insured individual . Motor vehicle insurance and property insurance provides compensation for damage to a client’s vehicle or other property . Compulsory third party liability insurance (CTP) contracts provide the insured with financial protection from the risk of civil liability of vehicle owners, which may occur as a result of harm to life, health or property of others when using vehicles . Voluntary third party (VTP) risk insurance contracts provide the insured with financial protection in case of insufficiency of in- surance payment for compulsory third party liability insurance of motor vehicle owners (CTP) to compensate for harm caused to life, health and / or property . Travel insurance provides compensation in case of medical or other unforeseen expenses of the client while being away from their place of permanent residence . Staff and administrative expenses for insurance operations are included in Note 25 . 25 Administrative and Other Operating Expenses In millions of RR Note 2019 Staff costs Taxes other than income tax Amortization of intangible assets Depreciation of fixed assets Depreciation of right-of-use assets Information services Professional services Operating lease expense Stationery Communication services Security expenses Collection expenses Other provisions Other administrative expenses 12 12 12 19,204 1,473 1,331 1,287 1,134 787 773 410 383 280 167 165 60 398 2018 15,602 1,148 899 823 - 570 333 799 263 254 171 168 - 469 Total administrative and other operating expenses 27,852 21,499 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 2019 amounted to RR 2 .8 million (2018: RR 2 .7 million) . The total fees charged by the Company's statutory auditor for the year ended 31 December 2019 for other assurance services amounted to RR 3 .8 million (2018: RR 4 .7 million), for tax advisory services amounted to RR 2 .3 million (2018: RR 5 .7 million) and for other non-assurance services amounted to RR 2 .2 million (2018: nil) . Included in staff costs are statutory social contributions to the non-budget funds and share-based remuneration: In millions of RR Statutory social contribution to the non-budget funds Share-based remuneration 2019 3,398 469 2018 2,582 630 The average number of employees employed by the Group during the reporting year, including those who are working under civil contracts, was 26,780 (2018: 21,577) . F-87 F-88 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 26 Other Operating Income In millions of RR Income from payment systems under marketing agreement Subrogation fee Other Total other operating income 27 Income Taxes Income tax expense comprises the following: In millions of RR Current tax Deferred tax Total income tax expense 2019 3,298 218 1,197 4,713 2019 13,844 (4,431) 9,413 2018 2,060 122 789 2,971 2018 4,639 3,463 8,102 The income tax rate applicable to the majority of the Group’s income is 20% (2018: 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% (2018: 12 .5%) . A reconciliation between the expected and the actual taxation charge is provided below . In millions of RR Profit before tax Theoretical tax expense at statutory rate of 20% (2018: 20%) Tax effect of items, which are not deductible or assessable for taxation purposes: - Non-deductible expenses - Other expenses including dividend tax Unrecognised tax losses Effects of different tax rates: - Income on government securities taxed at different rates - Results of companies of the Group taxed at different statutory rates 2019 45,536 9,107 2018 35,224 7,045 272 38 226 (214) (16) 311 740 177 (165) (6) Income tax expenses for the year 9,413 8,102 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 tem- porary 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% (2018: 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, taxes may accrue even where there is a consolidated tax loss . Therefore, deferred tax assets and liabilities are offset only when they relate to the same taxable entity and the same taxation authority . The tax effect of the movements in temporary differences for the year ended 31 December 2019 is detailed below . In millions of RR Tax effect of deductible and taxable tem- porary differences Loans and advances to customers Tangible fixed assets Right-of-use assets Intangible assets Revaluation of debt investment at FVOCI Revaluation of debt investment at FVTPL Accrued expenses and other temporary differences Lease liabilities Customer accounts Debt securities in issue Financial derivatives Insurance provisions 31 December 2018 1 January 2019 (IFRS 16 adoption) Credited/ (charged) to profit or loss Charged to OCI 31 December 2019 696 (601) - - - (334) (285) (487) 1 (773) - (21) (40) (324) 13 - - - - 333 - - - - 2,819 (3) 12 14 - - - - 3,515 (604) (322) (271) 702 (1,234) (1,019) (1) 586 6 (23) (22) 364 (23) - - - - - - - - (187) 339 (44) (62) 40 (10) Net deferred tax (liabilities)/assets (1,821) (1) 4,431 (1,234) 1,375 The tax effect of the movements in temporary differences for the year ended 31 December 2018 is detailed below . In millions of RR Tax effect of deductible and taxable tem- porary differences 31 December 2017 (Charged)/ credited to profit or loss Credited directly to equity Credited to OCI 31 December 2018 Loans and advances to customers 223 (1,636) 2,109 Tangible fixed assets Intangible assets Revaluation of debt investment at FVOCI Revaluation of debt investment at FVTPL Accrued expenses and other temporary differences Customer accounts Debt securities in issue Financial derivatives Insurance provisions (344) (312) (327) - (199) (30) (55) (435) - (257) 27 (827) 1 - - - - (919) 345 9 15 111 13 - - - - - - - 667 - - - - - - 696 (601) (285) (487) 1 (773) (21) (40) (324) 13 Net deferred tax liabilities (1,479) (3,463) 2,454 667 (1,821) F-89 F-90 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 28 Dividends The movements in dividends during the year ended 31 December 2019 and 2018 are as follows: In millions of RR Dividends payable at 1 January Dividends declared during the year Dividends paid during the year Dividends paid under MLTIP after vesting date Foreign exchange loss on dividends payable Dividends payable at 31 December Dividends per share declared during the year (in USD) Dividends per share paid during the year (in USD) 2019 760 5,856 (5,601) (524) 91 582 0.49 0.49 2018 377 12,265 (11,946) (144) 208 760 1.07 1.07 Dividends declared in the tables above represent dividends declared by the Board of Directors are reduced by RR 25 million for the year ended 31 December 2019 due to dividends on GDRs acquired by the Company from the market not for the imme- diate purposes of the existing MLTIP . On 13 May 2019 the Board of Directors declared an interim dividend of USD 0 .17 (RR 11 .09) per share/per GDR amounting to USD 31 .05 million (RR 2,026 million) . Declared dividends were paid in USD on 28 and 30 May 2019 . On 11 March 2019 the Board of Directors declared an interim dividend of USD 0 .32 (RR 21 .11) per share/per GDR amounting to USD 58 .4 million (RR 3,855 million) . Declared dividends were paid in USD on 25 and 27 March 2019 . On 27 August 2018 the Board of Directors declared a regular interim dividend of USD 0 .24 (RR 16 .27) per share/per GDR amounting to USD 43 .9 million (RR 2,972 million) . Declared dividends were paid in USD on 24, 28 and 29 September 2018 . On 29 May 2018 the Board of Directors declared a regular interim dividend of USD 0 .24 (RR 14 .95) per share/per GDR amounting to USD 43 .8 million (RR 2,730 million) . Declared dividends were paid in USD on 21 and 27 June 2018 . On 9 March 2018 the Board of Directors declared a regular interim dividend of USD 0 .31 (RR 17 .61) per share/per GDR amounting to USD 56 .6 million (RR 3,216 million) . Declared dividends were paid in USD on 4 and 9 April 2018 . Dividends were declared and paid in USD throughout the years ended 31 December 2019 and 2018 . Dividends payable at 31 December 2019 related to treasury shares acquired under MLTIP amounting to RR 582 million are included in other non-finan- cial liabilities (31 December 2018: RR 760 million) . On 11 June 2019 the Group announced suspension of dividend payments for the three months ended 30 June and 30 Sep- tember 2019 to ensure the Group will have the necessary capital to further support credit portfolio growth . 29 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 pre- sented . The debt items are those that are reported as financing in the consolidated statement of cash flows . Liabilities from financing activities Debt securities in issue Perpetual sub- ordinated bonds Other subordi- nated debt Lease liabilities Total In millions of RR At 1 January 2018 Cash flows Foreign exchange adjustments Other non-cash movements 10,819 (1,803) 580 9 17,115 (49) 3,553 25 4,886 (5,209) 382 (59) At 31 December 2018 9,605 20,644 Adoption of IFRS 16 Cash flows Foreign exchange adjustments Other non-cash movements - 16,671 (432) 234 - 46 (2,267) 64 At 31 December 2019 26,078 18,487 - - - - - - - - - - - 1,665 (1,087) - 1,116 1,694 32,820 (7,061) 4,515 (25) 30,249 1,665 15,630 (2,699) 1,414 46,259 30 Segment Analysis Operating segments are components that engage in business activities that may earn revenues or incur expenses, whose op- erating results are regularly reviewed by the chief operating decision maker (CODM) and for which discrete financial informa- tion 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 . 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, car loans, secured loans and brokerage services to individuals . IE and SME accounts services – representing customer current accounts, savings, deposits services and providing loans to individual entrepreneurs and small to medium businesses . Insurance operations – representing insurance services provided to individuals, such as personal accident insurance, personal property insurance, travel insurance and vehicle insurance (Note 24) . MVNO services - providing full coverage across Russia and international roaming, offering a number of value-added options such as virtual numbers, music and video streaming services, etc . 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 . F-91 F-92 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 30 Segment Analysis (Continued) 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 2019 is set out below: In millions of RR Retail bank- ing SME accounts services Insurance operations MVNO ser- vices Elimina- tions Total Cash and cash equivalents 31,098 25,524 3,851 43 (2,720) 57,796 Mandatory cash balances with the CBRF Due from other banks 3,448 250 Loans and advances to customers 330,905 Financial derivatives 390 - - 900 - - 1,834 - - Investments in securities 90,566 41,950 2,662 Guarantee deposits with payment systems Current income tax assets Deferred income tax assets Tangible fixed assets and right-of- use assets Intangible assets Other financial assets Other non-financial assets Total reportable segment assets 8,877 807 1,517 10,454 4,105 20,429 2,034 - - - - 823 444 - - 8 - - 196 1,768 592 - - - - - - - - 106 311 87 187 - - 3,448 2,084 (2,630) 329,175 - - - - - - - 390 135,178 8,877 815 1,517 10,560 5,435 (1,055) 21,673 (303) 2,510 504,880 69,641 10,911 734 (6,708) 579,458 Segment reporting of the Group’s income and expenses for the year ended 31 December 2019 is set out below: In millions of RR External revenues: Retail bank- ing SME accounts services Insurance operations MVNO ser- vices Elimina- tions Total Interest income calculated using the effective interest rate method 107,021 2,629 322 Other similar income 118 - Fee and commission income - IE and SME current accounts commission - 8,483 - Fee for selling credit protection - Acquiring commission - SMS fee - Interchange fee - Foreign currency exchange transactions fee - Card to card commission - Cash withdrawal fee - Income from MVNO services - Brokerage operations - Mortgage agency fee - Marketing services fee - Placement fee - Other fees receivable Timing of fee and commission income recognition: - At point in time - Over time 5,550 6,397 3,244 2,674 2,713 1,980 720 - 819 136 340 141 626 - 219 - 799 311 - - - - - - - - 22,096 9,726 3,244 86 - - - - - - - - - - - - - - - - - - - - - 13,792 - 288 - - - - - - - - - - 890 - - - - - 890 - 890 - - - - - 1 - - - - - - - - - - - - - - - - - - - - - - - - - 109,972 118 8,483 5,550 6,616 3,244 3,473 3,024 1,980 720 890 819 136 340 141 626 32,712 3,330 36,042 2,216 301 389 14,110 139 4,713 Due to banks 663 - Customer accounts 352,280 62,054 Debt securities in issue 26,078 Financial derivatives Deferred income tax liabilities Subordinated debt Insurance provisions Other financial liabilities Other non-financial liabilities Total reportable segment liabilities 590 142 18,487 - 14,091 5,067 - - - - - - 6,280 700 52 2,630 (2,630) 663 Total fee and commission income 25,340 9,812 - - - - - - (2,720) 411,614 - - - - - 26,078 590 142 18,487 6,280 912 58 (1,055) 14,648 (303) 4,874 Net gains from foreign exchange trans- lation Net gains from disposals of debt securi- ties at FVOCI Net gains from debt instruments at FVTPL Insurance premiums earned Credit loss allowance for debt securities at FVOCI Other operating income 2,216 301 389 318 139 4,355 - - - - - 69 - - - - - - - 417,398 62,054 7,032 3,600 (6,708) 483,376 Total external revenues 140,197 12,510 14,402 891 - 168,000 F-93 F-94 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 30 Segment Analysis (Continued) In millions of RR Revenues from other segments: Interest income calculated using the effec- tive interest rate method Fee and commission income: - Acquiring commission - Income from MVNO services - Other fees receivable Insurance premiums earned Other operating income Retail bank- ing SME accounts services Insurance operations MVNO ser- vices Elimina- tions Total 146 6 - 83 - 62 - - - - - - - 83 - - - 453 - 536 1 - (230) (6) 250 (250) - - - (83) (453) (62) 251 (1,084) - - - - - - - Total revenues from other segments 297 Total revenues 140,494 12,510 14,938 1,142 (1,084) 168,000 Interest expense calculated using the effec- tive interest rate method Other similar expense (19,979) (1,421) (129) - Expenses on deposit insurance (1,659) (211) Credit loss allowance for loans and ad- vances to customers and credit related commitments (27,169) (75) - - - - Fee and commission expense (14,755) (2,022) (14) Customer acquisition expense (15,361) (1,272) (1,091) Net losses from derivatives revaluation (2,563) - - - - (16) (4,891) (952) - Net losses from operations with foreign currencies Insurance claims incurred Administrative and other operating ex- penses (147) (5) - - (910) (986) - - - 230 (21,317) - - (134) (1,870) - (27,244) 253 (17,448) 533 (18,177) - - - (2,563) (968) (4,891) (23,124) (2,774) (1,185) (837) 68 (27,852) Segment reporting of the Group’s assets and liabilities as at 31 December 2018 is set out below: In millions of RR Retail bank- ing SME accounts services Insurance operations MVNO ser- vices Elimi- na-tions Total Cash and cash equivalents 19,621 13,110 3,537 15 (2,481) 33,802 Mandatory cash balances with the CBRF Due from other banks Loans and advances to customers Financial derivatives 2,435 - 199,513 1,710 - - 330 - - 776 386 - Investments in debt securities 68,375 30,394 1,371 Repurchase receivables Guarantee deposits with payment systems Current income tax assets Tangible fixed assets Intangible assets Other financial assets Other non-financial assets 1,182 4,603 1,104 8,280 3,214 15,316 2,344 - - - - 547 173 - - - - - 264 542 618 - - - - - - - - 89 198 46 150 - - 2,435 776 (1,740) 198,489 - - - - - - - 1,710 100,140 1,182 4,603 1,104 8,369 4,223 (435) 15,642 (88) 3,024 Total reportable segment assets 327,697 44,554 7,494 498 (4,744) 375,499 Due to banks Customer accounts Debt securities in issue Financial derivatives Current income tax liabilities Deferred income tax liabilities Subordinated debt Insurance provisions Other financial liabilities Other non-financial liabilities 2,708 - 242,092 41,702 9,605 3 51 1,821 20,644 - 9,746 3,367 - - - - - - - - - - - - - - - 2,859 1,711 63 1,344 (1,344) 2,708 (2,878) 280,916 - - - - - - - - - - - - 9,605 3 51 1,821 20,644 2,859 213 64 (469) 11,201 (53) 3,441 Segment result 34,803 4,735 7,741 (1,743) - 45,536 Total reportable segment liabilities 290,037 41,702 4,633 1,621 (4,744) 333,249 F-95 F-96 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 30 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 External revenues: Retail bank- ing SME accounts services Insurance operations MVNO ser- vices Elimi- na-tions Total Interest income calculated using the effec- tive interest rate method 74,283 1,807 179 Other similar income 456 - Fee and commission income: - SME current accounts commission - 6,943 - Fee for selling credit protection - Acquiring commission - Interchange fee - SMS fee - Foreign currency exchange transactions fee - Card to card commission - Cash withdrawal fee - Mortgage agency fee - Brokerage operations - Income from MVNO services - Placement fee - Marketing services fee - Other fees receivable Timing of fee and commission income recognition: - At point in time - Over time 5,601 4,078 2,595 2,256 1,576 1,279 885 419 210 - 167 108 376 - 84 451 - 209 - - - - - - - - 17,294 7,469 2,256 218 Total fee and commission income 19,550 7,687 Net gains from derivatives revaluation 1,784 Net gains from operations with foreign currencies Net gains from disposals of debt securities at FVOCI Insurance premiums earned 363 378 320 - - - - - - - - - - - - - - - - - - - - - - - 18 - 6,354 Other operating income 2,726 39 202 - - - - - - - - - - - - 186 - - - 186 - 186 - - - - 4 Total external revenues 99,860 9,533 6,753 190 - - - - - - - - - - - - - - - - - - - - - - - - - 76,269 456 6,943 5,601 4,162 3,046 2,256 1,785 1,279 885 419 210 186 167 108 376 24,949 2,474 27,423 1,784 381 378 6,674 2,971 116,336 Retail bank- ing SME accounts services Insurance operations MVNO ser- vices Elimi- na-tions Total In millions of RR Revenues from other segments: Interest income calculated using the effec- tive interest rate method Fee and commission income - Acquiring commission - Income from MVNO services - Other fees receivable Net gains from disposals of debt securities at FVOCI Insurance premiums earned Other operating income 50 40 - 17 79 - 59 - - - - - - - - 71 - - - - 311 382 Total revenues from other segments 245 Total revenues 100,105 9,533 7,135 Interest expense calculated using the effec- tive interest rate method (14,418) (1,212) Expenses on deposit insurance (1,090) (84) Credit loss allowance for loans and ad- vances to customers and credit related commitments (11,574) (33) Credit loss allowance for debt securities at FVOCI (192) - Fee and commission expense (10,453) (1,125) - - - - - Customer acquisition expense (11,189) (2,374) (772) - - 53 - - - - 53 243 (121) (40) (53) (17) (79) (311) (59) (680) - - - - - - - - (680) 116,336 (50) 121 (15,559) - - - - - - (1,174) (11,607) (192) (246) (254) 54 (11,770) 367 (14,222) Net losses from foreign exchange transla- tion (2,153) Net losses from debt instruments at FVTPL (808) Insurance claims incurred - - - - - - (2,126) (2) - - - - - (2,155) (808) (2,126) Administrative and other operating expens- es (17,372) (2,370) (1,002) (814) 59 (21,499) Segment result 30,856 2,335 3,235 (1,123) (79) 35,224 F-97 F-98 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 31 Financial and Insurance 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 func- tions 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 finan- cial 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 IE and SME 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 ., giving rise to financial assets and off-balance sheet credit-related commitments . The Group’s maximum exposure to credit risk is reflected in the carrying amounts of financial assets in the consolidated state- ment 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 33) . 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 y .o ., but not older than 70 y .o . at the time of loan repayment; • Availability of a cell-phone; • Permanent employment; • Permanent income . For cash loans, minimum requirements are listed below: • The requested loan term is from 3 to 36 months; For car loans minimum requirements are listed below: • The requested loan term is from 1 to 5 years; • Car loan volumes up to RR 2,000 thousand; • The requirement for the car is with an age not more than 18 years . For loans to SME minimum requirements are listed below: • Working capital loan: loan volumes up to RR 10,000 thousand and loan term to 6 months; • Credit for individual entrepreneurs for any purpose: loan volumes up to RR 2,000 thousand and loan term to 36 months; • Credit for individual entrepreneurs secured by real estate: loan volumes up to RR 15,000 thousand and loan term to 15 years . The requirement for the real estate is an apartment in the apartment building within the Russian Federation, which is free from any encumbrances; • Investment credit line secured by real estate: loan volumes up to RR 15,000 thousand and loan term to 5 years . The requirement for the real estate is an apartment in the apartment building within the Russian Federation, which is free from any encumbrances . 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 bureaus 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: a) if the credit card loan is overdue for more than 7 days, its account will be blocked till repayment; b) if the borrower had lost his/her source of income, then borrower account might be blocked till verification of his/her new • Cash loan volumes range between RR 50 thousand and RR 2,000 thousand . employment; 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 200 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, which is free from any encumbrances . c) 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 . When a customer experiences serious difficulties with his/her current debt servicing, he/she may be offered loan restructur- ing . 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: a) the client’s account balance was fixed, accrual of interest stopped; b) information about the client is considered to be up to date; c) the client denied restructuring program; d) term of limitation of court actions has not expired; e) court process is economically justified . F-99 F-100 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 31 Financial and Insurance Risk Management (Continued) The condition of early repayments is satisfied, as described in the table above, if cumulative amount of early repayments exceed 5% of the gross carrying amount at the date of recognition of the loan 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 cred- it-impaired loans qualifying for sale to external debt collection agencies: Each master scale credit risk grade is assigned a specific degree of creditworthiness: • Excellent – strong credit quality with minimum expected credit risk; a) loans remain unpaid after all collection procedures were performed (no payment during last 4-6 months); • Good – adequate credit quality with low expected credit risk; b) the debtor cannot be either reached or found for the previous 4 months; • Monitor – adequate credit quality with a moderate credit risk and credit cards loans before the first due date; c) the debtor has no assets and there is no expectation he/she will have any in the future; • Sub-standard – low credit quality with a substantial credit risk, includes restructured loans that are less than 90 days over- d) the debtor has died and there is no known estate or guarantor; e) 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) Excellent Good Monitor Sub-standard Doubtful Default AAA, AA+ to AA-, A+ to A- BBB+ to BBB-, BB+ BB to B+ B, B- CCC+ to CC- C, D Each master scale credit risk grade is assigned a specific degree of creditworthiness: • Excellent – high credit quality with lowest or very low expected credit risk; • Good – good credit quality with currently 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 . For measuring credit risk and grading loans and advances to customers, credit related commitments and those financial in- struments 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 For credit cards: non-overdue with PD < 5%; for other types of loans: non-overdue for the last 12 months with PD < 5% or with early repayments 1-30 days overdue for all types of loans or without first due date for credit card loans all other non-overdue loans 31-90 days overdue or restructured loans 0-90 days overdue 90+ days overdue Excellent Good Monitor Sub-standard NPL F-101 due; • 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 nec- essary . 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 follow- ing 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 . Forward looking information – the information that includes the key macroeconomic variables impacting credit risk and expect- ed 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 . F-102 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 31 Financial and Insurance Risk Management (Continued) ECL for POCI financial assets is always measured on a lifetime basis (Stage 3), so at the reporting date, the Group only recog- nises the cumulative changes in lifetime expected credit losses . Purchased or originated credit-impaired (POCI) financial assets – financial assets that are credit-impaired upon initial recognition . The Group carries out two separate approaches for ECL measurement: 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 . • 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; 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 . • for all other financial assets except FVTPL: assessment based on external ratings . 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 appropri- ateness 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, qualita- tive 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 . 18-month period was determined as the weighted average period of the most recent date where the credit limit was revised by at least 25%, which is considered to be a substantial revision . For all other loans: • 30 days past due; or The Group performs an assessment on a portfolio basis for the retail loans . This approach incorporates aggregating the port- folio 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 expo- sures to risk within a group are homogeneous . Examples of shared characteristics include type of customer, product type, credit risk rating, date of initial recognition, over- due 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 . • 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 where: months more than once . If the SICR criteria are no longer met, the instrument will be transferred back to Stage 1 . – probability of default in moment (can’t be higher than 100%); 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 . – exposure at default in moment ; – loss given default in moment ; This approach can be summarised in a three-stage model for ECL measurement: – number of months in the loan’s lifetime; • Stage 1 – a financial instrument that is not credit-impaired on initial recognition and its credit risk has not increased signifi- – effective interest rate; cantly since initial recognition, the loss allowance is based on 12-month ECLs; • Stage 2 – if since the date, which was assumed to be the date of initial recognition is identified a SICR, the financial instru- ment 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 . – remaining amount of payments . F-103 F-104 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 31 Financial and Insurance Risk Management (Continued) 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 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 fu- ture 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 . 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 behavioural 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 calcu- late 12-month ECLs . An assessment of a 12-month PD is based on the latest available historic default data using borrow- er-specific behavioural characteristics and adjusted for forward-looking information when appropriate . Based on borrow- er-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 expect- ed 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 statis- tics 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; • Moscow Prime Offered Rate; • 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 90 .8% weight, opti- mistic scenario having the 1 .3% weight and pessimistic scenario having the 7 .9% weight . 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 . The priority goal of market risk management is to maintain the risks assumed by the Group at a level determined by the Group in accordance with its own stra- tegic objectives . Management sets limits on the value of risk that may be accepted, which is monitored on a daily basis . Howev- er, the use of this approach does not prevent losses outside of these limits in the event of more significant market movements . 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 2019 At 31 December 2018 Non-de- rivative monetary financial assets Non-de- rivative monetary financial liabilities Derivatives Net position Non-de- rivative monetary financial assets Non-de- rivative monetary financial liabilities Derivatives Net position 491,635 (390,010) (12,995) 88,630 307,617 (264,073) (5,283) 38,261 46,930 (62,098) 13,422 (1,746) 37,550 (47,539) 7,245 (2,744) 18,902 (20,261) (595) (1,954) 11,318 (13,773) (233) (2,688) 677 87 (675) (788) (32) - (30) (701) 571 13 (586) (202) (22) - (37) (189) 558,231 (473,832) (200) 84,199 357,069 (326,173) 1,707 32,603 In millions of RR RR USD Euro GBP Others Total Derivatives presented above are monetary financial assets or monetary financial liabilities but are presented separately in or- der 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 37 . 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: In millions of RR USD strengthening by 20% (2018: by 20%) USD weakening by 20% (2018: by 20%) Euro strengthening by 20% (2018: by 20%) Euro weakening by 20% (2018: by 20%) GBP strengthening by 20% (2018: by 20%) GBP weakening by 20% (2018: by 20%) At 31 December 2019 At 31 December 2018 Impact on profit for the year Impact on total equity Impact on profit for the year Impact on total equity (277) 277 (310) 310 (5) 5 (277) 277 (310) 310 (5) 5 (417) 417 (408) 408 (6) 6 (417) 417 (408) 408 (6) 6 F-105 F-106 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 31 Financial and Insurance Risk Management (Continued) 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 . The Group is exposed to prepayment risk through providing fixed rate loans, which give the borrower the right to repay the loans early . The Group’s current year profit and equity at the end of the current reporting period would not have been signifi- cantly impacted by changes in prepayment rates because such loans are carried at amortised cost and the prepayment right is at or close to the amortised cost of the loans and advances to customers (2018: no material impact) . The table below summarizes the Group’s exposure to interest rate risks . The table presents the aggregated amounts of the Group’s financial assets and liabilities at carrying amounts, categorized by the earlier of contractual interest repricing or maturity dates: In millions of RR 31 December 2019 Demand and less than 1 month From 1 to 6 months From 6 to 12 months From 1 to 3 years More than 3 years Total Total financial assets 136,206 153,392 66,962 121,755 80,306 558,621 Total financial liabilities (199,880) (155,323) (62,923) (44,109) (12,187) (474,422) Net interest sensitivity gap at 31 December 2019 31 December 2018 (63,674) (1,931) 4,039 77,646 68,119 84,199 Total financial assets 103,449 124,541 35,930 31,883 62,976 358,779 Total financial liabilities (200,101) (56,301) (40,080) (3,743) (25,951) (326,176) Net interest sensitivity gap at 31 December 2018 (96,652) 68,240 (4,150) 28,140 37,025 32,603 The Group has no significant risk associated with variable interest rates on loans and advances provided to customers or loans received . The aim of interest rate risk management is to maintain the risks assumed by the Group within the limits determined by the Group in accordance with its own strategic objectives . The interest rate risk is managed by setting caps and floors in relation to interest rates on financial assets and liabilities depending on their types and maturities and balancing the assets and liabilities which are sensitive to changes in interest rates . The assessment of the magnitude of interest rate risk is carried out by performing a sensitivity analysis which imply assess- ment of impact on net interest income of a shift in interest rates by 200 basis points . At 31 December 2019, if interest rates at that date had been 200 basis points lower/higher (2018: 200 basis points), with all other variables held constant, profit for the year would have been RR 1,684 million (2018: RR 652 million) lower/higher, equity would have been RR 1,684 million (2018: RR 652 million) lower/higher . The Group monitors interest rates for its financial instruments . The table below summarizes interest rates for the years 2019 and 2018 based on reports reviewed by key management personnel . For securities, the interest rates represent yields to maturity based on market quotations at the reporting date: In % p.a. Assets 2019 2018 RR USD EURO GPB Other RR USD EURO GPB 0 .0 0 .0 0 .0 0 .0 0 .0 0 .0 0 .0 0 .0 Cash and cash equivalents Loans and advances to customers Due from banks Investment in securities 0 .0 37 .2 5 .3 7 .9 - 1 .6 4 .3 Repurchase receivables - - Liabilities Due to banks Customer accounts Debt securities in issue Subordinated debt 6 .2 5 .1 9 .0 0 .0 1 .0 3 .8 - 10 .0 - - 2 .4 - - 0 .1 1 .2 - - - - - - - - - - - 0 .1 0 .0 - - - - 42 .7 5 .9 8 .5 7 .4 7 .0 5 .2 9 .9 - - 4 .5 4 .3 2 .4 0 .9 4 .4 - 10 .0 - - 3 .2 - - 0 .4 1 .4 - - - - - - 0 .3 - - The sign “-” in the table below means that the Group does not have the respective assets or liabilities in the corresponding currency . Other price risk. The Group has exposure to equity price risk . Transactions with equity instruments are monitored and author- ised by the Group’s Treasury function . At 31 December 2019, if equity prices at that date had been 20% lower (higher) with all other variables held constant, profit for the year would have been RR 83 million lower (higher) . F-107 F-108 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 31 Financial and Insurance Risk Management (Continued) Geographical risk concentrations. The geographical concentration of the Group’s financial assets and liabilities at 31 Decem- ber 2019 is set out below: In millions of RR Financial assets Russia OECD Other Non-OECD Listed Total Cash and cash equivalents 54,893 2,903 Mandatory cash balances with the CBRF Due from other banks Loans and advances to customers Financial derivatives Investments in securities Repurchase receivables Guarantee deposits with payment systems Other financial assets Total financial assets Financial liabilities Due to banks Customer accounts Debt securities in issue Financial derivatives Subordinated debt Insurance provisions Other financial liabilities Total financial liabilities 3,448 2,084 329,175 390 134,765 - 501 - - - 413 - 8,376 8,272 13,401 533,528 25,093 663 411,504 2,460 590 - 2,342 14,589 432,148 - - - - - 59 59 - Credit related commitments (Note 33) 168,059 - - - - - - - - - - - - - - - - - - - - - 57,796 3,448 2,084 329,175 390 135,178 - 8,877 21,673 558,621 663 110 - 411,614 - - - - 23,618 26,078 - 590 18,487 18,487 2,342 - 14,648 110 42,105 474,422 - 168,059 The geographical concentration of the Group’s financial assets and liabilities at 31 December 2018 is set out below: Russia OECD Other Non-OECD Listed Total In millions of RR Financial assets Cash and cash equivalents Mandatory cash balances with the CBRF Due from other banks Loans and advances to customers Financial derivatives Investment in debt securities Repurchase receivables Guarantee deposits with payment systems Other financial assets Total financial assets Financial liabilities Due to banks Customer accounts Debt securities in issue Financial derivatives Subordinated debt Insurance provisions Other financial liabilities Total financial liabilities 31,911 2,435 776 198,489 1,710 100,126 1,182 168 8,212 1,891 - - - - - - 4,435 7,430 - - - - - 14 - - - 345,009 13,756 14 2,708 280,118 3,754 3 - 1,099 11,018 298,700 - - - - - - 183 183 - - 798 - - - - - - - - - - - - - - - - - 33,802 2,435 776 198,489 1,710 100,140 1,182 4,603 15,642 358,779 2,708 280,916 5,851 9,605 - 3 20,644 20,644 - - 1,099 11,201 798 26,495 326,176 - - 110,478 Credit related commitments (Note 33) 110,478 Assets, liabilities and credit related commitments have been based on the country in which the counterparty is located . Cash on hand has been allocated based on the country in which they are physically held . Balances with Russian counterparties actu- ally outstanding to/from offshore companies of these Russian counterparties, are allocated to the caption “Russia” . Other risk concentrations. Management monitors and discloses concentrations of credit risk by obtaining reports listing exposures to borrowers with aggregated loan balances in excess of 10% of net assets . The Group did not have any such signifi- cant risk concentrations at 31 December 2019 and 2018 . Liquidity risk. Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities . The Group is exposed to daily calls on its available cash resources from unused limits on issued credit cards, retail deposits from customers, current accounts and due to banks . The Group does not maintain cash resources to meet all of these needs as experience shows that only a certain level of calls will take place and it can be predicted with a high level of certainty . Liquidity risk is managed by the Financial Committee of the Bank . The Group seeks to maintain a stable funding base primarily consisting of amounts due to institutional investors, corporate and retail customer deposits and debt securities . The Group keeps all available cash in diversified portfolios of liquid instruments such as a correspondent account with CBRF and over- night placements in high-rated commercial banks, in order to be able to respond quickly and smoothly to unforeseen liquidity requirements . The available cash at all times exceeds all accrued financing costs falling due within half a year plus two months of regular operating costs . F-109 F-110 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 31 Financial and Insurance Risk Management (Continued) The maturity analysis of financial liabilities at 31 December 2018 is as follows: The liquidity management of the Group requires consideration of the level of liquid assets necessary to settle obligations as they fall due; maintaining access to a range of funding sources; maintaining funding contingency plans; and monitoring balance sheet liquidity ratios against regulatory requirements . The liquidity analysis takes into account the covenant requirements and ability of the Group to waive any potential breaches within the grace period . The Bank calculates liquidity ratios on a daily basis in accordance with the requirements of the CBRF . The Bank has complied with these ratios throughout 2019 and 2018 . The CFO receives information about the liquidity profile of the financial assets and liabilities . This includes daily, weekly, monthly and quarterly updates on the level of credit card transactions and repayments, statistics on credit card issuance and credit card limit utilisation, inflow and outflow of retail deposits, changes in the investment securities portfolio, level of expected outflows such as operating costs and financing activities . The CFO then ensures the availability of an adequate portfolio of short-term liquid assets, made up of an amount on the correspondent account with the CBRF and overnight deposits with banks, to ensure that sufficient liquidity is maintained within the Group as a whole . Regular liquidity stress testing under a variety of scenarios covering both normal and more severe market conditions and credit card portfolio behaviour is reviewed by the CFO . The table below shows liabilities at 31 December 2019 by their remaining contractual maturity . The amounts of liabilities dis- closed in the maturity table are the contractual undiscounted cash flows and gross loan commitments . Such undiscounted cash flows differ from the amount included in the consolidated statement of financial position because the consolidated statement of financial position amount is based on discounted cash flows . When the amount payable is not fixed, the amount disclosed is determined by reference to the conditions existing at the reporting date . Foreign currency payments are translated using the spot exchange rate at the end of the reporting period . The maturity analysis of financial liabilities at 31 December 2019 is as follows: In millions of RR Liabilities Due to banks Demand and less than 1 month From 1 to 3 months From 3 to 6 months From 6 to 12 months More than 1 year Total 663 - - - - 663 Customer accounts 189,176 84,108 70,530 60,627 11,605 416,046 Debt securities in issue Subordinated debt Insurance provisions Other financial liabilities Financial derivatives 168 149 463 14,648 - Credit related commitments (Note 33) 168,059 338 291 917 - 199 - 487 440 438 - 203 - 2,082 23,795 26,870 891 296 - 18,541 20,312 228 2,342 - 14,648 399 19,833 20,634 - - 168,059 Total potential future payments for financial obligations 373,326 85,853 72,098 64,295 74,002 669,574 In millions of RR Liabilities Due to banks Demand and less than 1 month From 1 to 3 months From 3 to 6 months From 6 to 12 months More than 1 year Total 2,708 - - - - 2,708 Customer accounts 191,308 24,257 32,600 34,571 1,719 284,455 Debt securities in issue Subordinated debt Insurance provisions Other financial liabilities Financial derivatives 55 167 213 11,201 - Credit related commitments (Note 33) 110,478 106 320 422 - 92 - 162 493 217 - 92 - 4,175 5,906 10,404 998 20,865 22,843 156 - 91 - 1,099 11,201 185 9,706 10,075 - - 110,478 Total potential future payments for financial obligations 316,130 25,197 33,564 40,085 38,287 453,263 Financial derivatives receivable and payable are disclosed in the Note 37 . The tables above present only the gross payables . Insurance provisions are disclosed in the table above based on their expected maturities . Customer accounts are classified in the above analysis based on contractual maturities . However, in accordance with the Russian Civil Code, individuals have a right to withdraw their deposits prior to maturity if they forfeit their right to accrued interest . The Group takes on exposure to liquidity risk, which is the risk of cash surplus in case of assets-liabilities cash-flow profile mismatch . Exposure to liquidity risk arises as a result of the Group’s borrowing and operational activities that assume cash payment obligations . The Group uses daily, short-term and long-term reporting, stress-testing and forecasting practices to monitor and prevent potential liquidity problems . The Group is actively increasing the number of counterparties for interbank lending, looks for new wholesale markets, improves and creates additional debit and credit products to have more instruments over cash-flow management . The recent economic situation has resulted in increased liquidity risk . In response the manage- ment of the Group preserves cash safety cushions for possible cash outflows and has planned Group’s liquidity position for the next year to ensure it can cover all upcoming payment obligations . The expected maturity analysis of financial instruments at carrying amounts as monitored by management at 31 December 2019 is presented in the table below . F-111 F-112 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 Total 57,796 3,448 2,084 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 31 Financial and Insurance Risk Management (Continued) Demand and less than 1 month From 1 to 3 months From 3 to 6 months From 6 to 12 months From 1 to 5 years More than 5 years In millions of RR Assets Cash and cash equivalents 57,796 - 510 - - 346 46 - 513 - - 571 2,038 - - - 1,508 - Mandatory cash balances with the CBRF Due from other banks Loans and advances to customers 48,391 63,640 63,466 61,884 79,105 12,689 329,175 Financial derivatives - Investments in securities 135,178 - - - - - - 390 - - - 390 135,178 Guarantee deposits with payment systems 1,304 1,717 1,712 1,669 2,133 342 8,877 Other financial assets 21,569 63 20 10 11 - 21,673 Total financial assets 265,746 65,930 65,590 64,076 84,248 13,031 558,621 Liabilities Due to banks 663 - - - - Customer accounts 180,017 60,879 41,259 61,298 68,161 - - 663 411,614 Debt securities in issue Financial derivatives Subordinated debt Insurance provisions Other financial liabilities - - - 463 14,648 411 - 158 917 - 599 1,008 12,463 11,597 26,078 - - 438 - - - 296 - 590 18,329 228 - - - - - 590 18,487 2,342 14,648 Total financial liabilities 195,791 62,365 42,296 62,602 99,771 11,597 474,422 Net liquidity gap at 31 December 2019 Cumulative liquidity gap at 31 December 2019 69,955 3,565 23,294 1,474 (15,523) 1,434 84,199 69,955 73,520 96,814 98,288 82,765 84,199 - Provision for unearned premiums in the amount of RR 3,938 million is not included in the insurance provisions stated above . Refer to Note 18 . The expected maturity analysis of financial instruments at carrying amounts as monitored by management at 31 December 2018 is presented in the table below . Demand and less than 1 month From 1 to 3 months From 3 to 6 months From 6 to 12 months From 1 to 5 years More than 5 years Total In millions of RR Assets Cash and cash equivalents 33,802 - - - - 1,602 13 66 206 106 - 298 431 363 126 - - - 33,802 2,435 776 Mandatory cash balances with the CBRF Due from other banks Loans and advances to cus- tomers 33,496 44,272 43,675 40,612 35,292 1,142 198,489 Financial derivatives - Investment in debt securities 100,140 Repurchase receivables 1,182 - - - - - - Guarantee deposits with pay- ment systems 1,084 1,463 1,138 Other financial assets 15,542 63 21 - - - 735 11 1,710 - - 183 5 - - - - - 1,710 100,140 1,182 4,603 15,642 Total financial assets 186,861 46,070 44,940 42,087 37,679 1,142 358,779 Liabilities Due to banks 2,708 - - - - Customer accounts 119,413 42,478 28,554 43,657 46,814 Debt securities in issue Financial derivatives Subordinated debt Insurance provisions Other financial liabilities - - - 213 11,201 - - 114 422 - 274 4,027 5,304 - - 217 - - - 156 - 3 20,530 91 - - - - - - - 2,708 280,916 9,605 3 20,644 1,099 11,201 Total financial liabilities 133,535 43,014 29,045 47,840 72,742 - 326,176 Net liquidity gap at 31 December 2018 Cumulative liquidity gap at 31 December 2018 53,326 3,056 15,895 (5,753) (35,063) 1,142 32,603 53,326 56,382 72,277 66,524 31,461 32,603 - Provision for unearned premiums in the amount of RR 1,760 million is not included in the insurance provisions stated above . Refer to Note 18 . As at the 31 December 2019 all the investment in debt securities are classified within demand and less than one month as they are easy repoable in CBR or on the open market securities and can provide immediate liquidity to the Group . All current accounts of individuals are classified within demand and less than one month (2018: the same) . F-113 F-114 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 31 Financial and Insurance Risk Management (Continued) Effect of changes in the key assumptions as at 31 December 2019: The allocation of deposits of individuals considers the statistics of autoprolongations and top-ups of longer deposits with the funds from shorter deposits after their expiration in case when the customers have more than one active deposit . The match- ing and/or controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the manage- ment of the Group . It is unusual for banks ever to be completely matched since business transacted is often of an uncertain term and of different types . An unmatched position potentially enhances profitability but can also increase the risk of losses . The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they ma- ture, are important factors in assessing the liquidity of the Group and its exposure to changes in interest and exchange rates . Management believes that in spite of a substantial portion of customer accounts being on demand, diversification of these deposits by number and type of depositors, and the past experience of the Group would indicate that these customer accounts provide a long-term and stable source of funding for the Group . Insurance risk. Insurance risk is the risk associated with insurance contracts, consisting in the possibility of the occurrence of an insurance event and the uncertainty of the amount and time of occurrence of the loss associated with it . The insurance risk management process covers all stages, from the stage of development of insurance rates to the settlement of losses . The main steps in the insurance risk management process include: • Underwriting and regulation of tariff policy; • Efficiency of the loss settlement process; • Diversification of the insurance portfolio . Tariff policy. The process of underwriting and regulation of the tariff policy includes the formation of tariffs for certain areas of activity based on the analysis of results for previous periods, existing market conditions and the Insurance Company's strategy . The insurance tariff is set on the basis of the analysis of the expected loss ratio based on Group’s insurance portfolio and similar products on the market, the commission ratio based on the analysis of product profitability and commission rates for similar products on the market, and the analysis of the average market rate . When developing tariffs, factors such as expected inflation and changes in the legislation of the Russian Federation are also taken into account . The Insurance Company monitors the correctness of the calculation of the insurance premium under the insurance contract by analyzing, on a regular basis, the deviations of the actual received premiums from the estimated premiums . Loss settlement process. In accordance with the insurance contract, the policyholder is obliged to notify the insurance company of a loss within a certain period of time . Losses are settled by specialized units, other than selling business units . The insurance claims will be paid only after receiving all the necessary documents confirming the fact of the insured event . Also, if necessary, economic security department and legal department are involved in checking documents for settlement of losses . If at the time of payment of the insurance claims the policyholder had outstanding debt of the insurance premium, the unpaid part is deducted from the amount of compensation . If there is a third party that caused an insurance loss to the insured client, the Group has a right to pursue third parties respon- sible for loss for payment of some or all costs related to the claims settlement process of the Group . Diversification of the insurance portfolio. To reduce insurance risk, the Group also uses the diversification of its insurance portfolio - it insures a large number of small risks, which, in particular, is achieved through the remote provision of insurance services almost throughout the Russian Federation . The company does not operate outside the Russian Federation and is exposed to risks associated with the geographical features of the regions of the Russian Federation . Sensitivity analysis. The following analyses the possible changes in the key assumptions used in the calculation of insurance liabilities under contracts other than life insurance, provided that the other assumptions are constant . This analysis reflects the impact on gross and net liabilities, profit before tax and equity of the Group . In millions of RR except for the number of claims Change in as- sumptions Effect on insur- ance obligations other than life insurance Effect on the re- insurers' share in insurance obliga- tions other than life insurance Effect on profit before tax Effect on equity The average cost of insurance claims The average number of claims – 10% + 10% – 10% + 10% (193) 193 193 (193) - - - - 193 154 (193) (193) (154) (154) 193 154 Effect of changes in the key assumptions as at 31 December 2018: In millions of RR except for the number of claims Change in as- sumptions Effect on insur- ance obligations other than life insurance Effect on the re- insurers' share in insurance obliga- tions other than life insurance Effect on profit before tax Effect on equity The average cost of insurance claims The average number of claims – 10% + 10% – 10% + 10% (97) 97 (97) 97 - - - - 97 (97) 97 (97) 77 (77) 77 (77) 32 Management of Capital The Group’s objectives when managing capital are (i) for the Bank to comply with the capital requirements set by the Central Bank of Russian Federation (CBRF), (ii) for the Insurance Company to comply with the capital requirements set by the legisla- tion of the Russian Federation, (iii) for the Group to comply with the financial covenants set by the terms of securities issued; (iv) to safeguard the Group’s ability to continue as a going concern . The Group considers total capital under management to be equity attributable to shareholders of the Company as shown in the consolidated statement of financial position . The amount of capital that the Group managed as of 31 December 2019 was RR 95,979 million (31 December 2018: RR 42,014 million) . Compliance with capital adequacy ratios set by the CBRF is monitored daily and submitted to the CBRF monthly with reports outlining their calculation reviewed and signed by the Bank’s Chief Executive Officer and Chief Accountant . Other objectives of capital management are evaluated annually . The amount of regulatory capital of Tinkoff Bank calculated in accordance with the methodology set by CBRF as at 31 December 2019 was RR 99,731 million, and the equity capital adequacy ratio (N1 .0) was 12 .12% (31 December 2018: RR 74,375 million and 13 .92%) . Minimum required statutory equity capital adequacy ratio (N1 .0) was 8% as at 31 December 2019 (31 December 2018: 8%) . F-115 F-116 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 32 Management of Capital (Continued) The Group also monitors capital requirements including capital adequacy ratio under the Basel III methodology of the Basel Committee on Banking Supervision: global regulatory framework for more resilient banks and banking systems (hereinafter “Basel III”) . The composition of the Group’s capital calculated in accordance with the methodology set by Basel Committee with capital adjustments as set out in Basel III is as follows: In millions of RR Share capital Share premium Treasury shares Share-based payment reserve Retained earnings Revaluation reserve for investments in debt securities Less intangible assets Non-controlling interest Common Equity Tier 1 (CET1) Additional Tier 1 Tier 1 capital Total capital Risk weighted assets (RWA) Credit risk Operational risk Market risk 31 December 2019 31 December 2018 230 26,998 (3,164) 1,039 66,880 3,996 (5,435) 103 90,647 18,487 109,134 109,134 412,741 152,881 4,603 188 8,623 (3,670) 1,232 36,785 (1,144) (4,223) 236 38,027 20,644 58,671 58,671 276,875 109,818 6,626 Total risk weighted assets (RWA) 570,225 393,319 Common equity Tier 1 capital adequancy ratio (CET1/ Total RWA), % Tier 1 capital adequacy ratio (Tier 1 capital / Total RWA), % Total capital adequacy ratio (Total capital / Total RWA), % 15.90% 19.14% 19.14% 9.67% 14.92% 14.92% The Group and the Bank have complied with all externally imposed capital requirements throughout the years ended 31 De- cember 2019 and 2018 . The Insurance Company has complied with all capital requirements set by the legislation of the Russian Federation throughout the years ended 31 December 2019 and 2018 . 33 Contingencies and Commitments Legal proceedings. From time to time and in the normal course of business, claims against the Group may be received . On the basis of its own estimates and internal professional advice, management is of the opinion that no material unprovided losses will be incurred in respect of claims . Tax contingencies. Russian tax legislation which was enacted or substantively enacted at the end of the reporting period, is subject to varying interpretations when being applied to the transactions and activities of the Group . Consequently, tax positions taken by management and the formal documentation supporting the tax positions may be challenged tax authorities . Russian tax administration is gradually strengthening, including the fact that there is a higher risk of review of tax transactions without a clear business purpose or with tax incompliant counterparties . Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year when decision about review was made . Under certain circumstances reviews may cover longer periods . The Russian transfer pricing legislation is generally aligned with the international transfer pricing principles developed by the Organisation for Economic Cooperation and Development (OECD), although it has specific features . This legislation provides for the possibility of additional tax assessment for controlled transactions (transactions between related parties and certain transactions between unrelated parties), if such transactions are not on an arm's length . Tax liabilities arising from controlled transactions are determined based on their actual transaction prices . It is possible, with the evo- lution of the interpretation of transfer pricing rules, that such transfer prices could be challenged . The impact of any such challenge cannot be reliably estimated; however, it may be significant to the financial position and/or the overall operations of the Group . The Group includes companies incorporated outside of Russia . The tax liabilities of the Group are determined on the assumption that these companies are not subject to Russian profits tax, because they do not have a permanent establishment in Russia . The Company is a tax resident of Cyprus only and full beneficial owner of the Bank and Insurance Company . This interpretation of relevant legislation may be challenged but the impact of any such challenge cannot be reliably estimated currently; however, it may be signifi- cant to the financial position and/or the overall operations of the Group . The Controlled Foreign Company (CFC) legislation introduced Russian taxation of profits of foreign companies and non-corporate structures (including trusts) controlled by Russian tax residents (controlling parties) . The CFC income is subject to a 20% tax rate if the CFC is controlled by a legal entity and a rate of 13% if it is controlled by an individual . As a result, management reassessed the Group’s tax positions and recognised current tax expense as well as deferred taxes that arose from the expected taxable manner of recovery of the relevant Group’s operations to which the CFC legislation applies to and to the extent that the Group (rather than its owners) is obliged to settle such taxes . As Russian tax legislation does not provide definitive guidance in certain areas, the Group adopts, from time to time, interpretations of such uncertain areas that reduce the overall tax rate of the Group . While management currently estimates that the tax positions and interpretations that it has taken can probably be sustained, there is a possible risk that outflow of resources will be required should such tax positions and interpretations be challenged by the tax authorities . The impact of any such challenge cannot be relia- bly estimated; however, it may be significant to the financial position and/or the overall operations of the Group . As at 31 December 2019 and 31 December 2018 no material tax risks were identified . Future lease payments related to leases where leased asset is of low value at 31 December 2019. The future cash outflows to which the Group is exposed and which are not reflected in the lease liabilities amounted to RR 59 million at 31 December 2019 and relate primarily to leases of assets which are of low value . Maturity analysis of lease liabilities. The expected maturity analysis of lease liabilities at carrying amounts at 31 December 2019 is presented in the table below . In millions of RR Lease liabilities Demand and less than 1 month From 1 to 3 months From 3 to 6 months From 6 to 12 months From 1 to 5 years 11 109 111 209 1,254 Total 1,694 Compliance with covenants. The Group is subject to certain covenants related primarily to its subordinated perpetual debt . Non-compliance with such covenants may result in negative consequences for the Group . Management believes that the Group was in compliance with all such covenants as at 31 December 2019 and 31 December 2018 . F-117 F-118 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 33 Contingencies and Commitments (Continued) Credit related commitments and performance guarantees issued. The primary purpose of these instruments is to ensure that funds are available to a customer as required . Commitments to extend credit represent unused portions of authorizations to extend credit in the form of credit card loans, guarantees . With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments, if the unused amounts were to be drawn down . Most commitments to extend credit are contingent upon customers maintaining specific credit standards . The Group monitors the term to maturity of credit related commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments . Performance guarantees are contracts that provide compensation if another party fails to perform a contractual obligation . Such contracts do not transfer credit risk . The risk under performance guarantee contracts is the possibility that the insured event (i .e . the failure to perform the contractual obligation by another party) occurs . The key risks the Group faces are signif- icant fluctuations in the frequency and severity of payments incurred on such contracts relative to expectations . The Group uses a scoring model to predict levels of such payments . Claims must be made before the contract matures and most claims are settled within short term . This allows the Group to achieve a high degree of certainty about the estimated payments and therefore future cash flows . Outstanding credit related commitments and performance guarantees are as follows: In millions of RR Unused limits on credit card loans Credit loss allowance 31 December 2019 31 December 2018 168,059 110,478 (2,242) (2,041) Total credit related commitments, net of сredit loss allowance 165,817 108,437 Performance guarantees issued Provisions Total performance guarantees issued, net of provisions 660 (3) 657 44 - 44 The total outstanding contractual amount of unused limits on contingencies and commitments liability does not necessarily represent future cash requirements, as these financial instruments may expire or terminate without being funded . In accord- ance with credit card service conditions the Group has a right to refuse the issuance, activation, reissuing or unblocking of a credit card, and is providing a credit card limit at its own discretion and without explaining its reasons . The following table contains an analysis of credit related commitments by credit quality at 31 December 2019 based on credit risk grades . In millions of RR (12-months ECL) Credit related commitments Stage 1 Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit impaired) - Excellent - Good - Monitor Unrecognised gross amount Credit loss allowance Unrecognised net amount 145,154 12,285 10,360 167,799 (2,228) 165,571 - 84 176 260 (14) 246 - - - - - - Total 145,154 12,369 10,536 168,059 (2,242) 165,817 The following table contains an analysis of credit related commitments by credit quality at 31 December 2018 based on credit risk grades . In millions of RR (12-months ECL) Credit related commitments Stage 1 Stage 2 (lifetime ECL for SICR) Stage 3 (lifetime ECL for credit impaired) - Excellent - Good - Monitor Unrecognised gross amount Credit loss allowance Unrecognised net amount 94,144 7,274 8,827 110,245 (2,024) 108,221 - 71 162 233 (17) 216 - - - - - - Total 94,144 7,345 8,989 110,478 (2,041) 108,437 Also, the Group may decide to increase or decrease a credit card limit using a scoring model, which is based on the client's behaviour model . Therefore, the fair value of the contractual amount of revocable unused limits on contingencies and commit- ments is close to zero . Credit related commitments are denominated in RR . The following table contains an analysis of performance guarantees issued by credit quality based on credit risk grades . In millions of RR Performance guarantees issued - Excellent - Good Unrecognised gross amount Provisions Unrecognised net amount 2019 Stage 1 (12-months ECL) 2018 Stage 1 (12-months ECL) 415 245 660 (3) 657 44 - 44 - 44 Mandatory cash balances with the CBRF of RR 3,448 million as at 31 December 2019 (31 December 2018: RR 2,435 million) represent mandatory reserve deposits which are not available to finance the Bank's day to day operations . F-119 F-120 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 34 Offsetting Financial Assets and Financial Liabilities Financial instruments subject to offsetting, enforceable master netting and similar arrangements are as follows at 31 Decem- ber 2019: Gross amounts before offsetting Gross amounts set off in the consolidated statement of fi- nancial position Net amount af- ter offsetting in the consolidated statement of fi- nancial position Amounts subject to master netting and similar arrange- ments not set off in the consolidated statement of financial position Financial in- struments Cash collat- eral Net amount of expo- sure In millions of RR Assets Reverse repurchase agreements 20,681 Due from banks Financial derivatives Total assets subject to offset- ting, master netting and similar arrangement LIABILITIES Due to banks Financial derivatives Total liabilities subject to offset- ting, master netting and similar arrangement 204 20 20,905 663 227 890 - - - - - - - 20,681 22,369 204 20 227 - - - 23 (1,688) (23) (3) 20,905 22,596 23 (1,714) 663 227 890 20 - - 643 204 23 20 204 666 Financial instruments subject to offsetting, enforceable master netting and similar arrangements are as follows at 31 Decem- ber 2018: Gross amounts set off in the consolidated statement of financial posi- tion Net amount af- ter offsetting in the consolidated statement of fi- nancial position Gross amounts before offsetting Amounts subject to master netting and similar arrange- ments not set off in the consolidated statement of financial position Financial in- struments Cash collat- eral Net amount of expo- sure 11,147 1,182 1,706 14,035 1,598 1,111 2,709 - - - - - - - 11,147 1,182 1,706 12,389 - (1,242) - - 1,111 1,598 71 108 14,035 12,389 2,709 (1,063) 1,598 1,111 1,706 1,182 2,709 2,888 - - - (108) (71) (179) In millions of RR Assets Reverse repurchase agreements Repurchase receivables Financial derivatives Total assets subject to offset- ting, master netting and similar arrangement LIABILITIES Correspondent accounts and over- night placements of other banks Sale and repurchase agreements Total liabilities subject to offset- ting, master netting and similar arrangement As at 31 December 2019 the Group has master netting arrangements with counterparty banks, which are enforceable in case of default . The Group also made margin deposits with clearing house counterparty as collateral for its outstanding derivative positions . The counterparty may set off the Group’s liabilities with the margin deposit in case of default (2018: same) . The disclosure does not apply to loans and advances to customers and related customer deposits . 35 Transfers of Financial Assets. The Group transferred financial assets in transactions that did not qualify for derecognition in the current periods . The table below shows the amount of operations under sale and repurchase agreements which the Group enters into in the normal course of business: In millions of RR Debt securities at FVOCI pledged under repurchase agreements Securities of clients pledged under repurchase agreements Notes 14 14 Total 31 December 2019 31 December 2018 Carrying amount of the assets Carrying amount of the associated liabilities Carrying amount of the assets Carrying amount of the associated liabilities - - 1,182 1,111 683 683 640 640 - - 1,182 1,111 In the normal course of business, the Group makes borrowings on interbank market using different financial instruments as collateral to support its everyday operations in terms of liquidity . The Group also enters into reverse sale and repurchase agreements . The summary of such operations is provided in the table below: In millions of RR 31 December 2019 31 December 2018 Amounts granted under repo agree- ments Fair value of securities received as collateral Amounts granted under repo agree- ments Fair value of securities received as collateral Cash and cash equivalents 20,681 22,369 11,147 12,389 Total 20,681 22,369 11,147 12,389 F-121 F-122 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 Included in financial derivatives held by the Group as at 31 December 2019 are three outstanding swap contracts with total positive fair value of RR 380 million and three outstanding swap contracts with total negative fair value of RR 586 million (2018: three outstanding swap contracts with total positive fair value of RR 1,706 million) . 38 Fair Value of Financial Instruments Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) level one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities, (ii) level two measurements are valuation techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and (iii) level three measurements are valuations not based on observable market data (that is, unobservable inputs) . (a) Recurring fair value measurements Recurring fair value measurements are those that the accounting standards require or permit in the consolidated statement of financial position at the end of each reporting period . The levels in the fair value hierarchy into which the recurring fair value measurements are categorised are as follows: In millions of RR Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total 31 December 2019 31 December 2018 ASSETS AT FAIR VALUE Investments in securities 133,239 1,939 - 135,178 94,647 5,493 Repurchase receivables - - - - 1,182 - Total assets recurring fair value measurements LIABILITIES AT FAIR VALUE Financial derivatives Total liabilities recurring fair value measurements 133,239 2,329 - 135,568 95,829 7,203 - 103,032 - - 590 590 - - 590 590 - - 3 3 - - 3 3 Investments in securities categorised in level 2 are represented by liquid debt securities classified in “Good” credit risk grade . - - - 1,710 100,140 1,182 Revenue Profit income Cash flows Financial derivatives - 390 - 390 - 1,710 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 36 Non-Controlling Interest The following table provides information about each subsidiary that has non-controlling interest: Place of business (and country of incorpo-ration if different) Proportion of non-con- trolling interest Proportion of non-con- trolling inter- est’s voting rights held Profit or loss attribu-table to non-con- trolling interest Accumu-lated non-con- trolling interest in the subsidiary Dividends paid to non-con- trolling inter- est during the year In millions of RR Year ended 31 Decem- ber 2019 LLC “Cloudpayments” Russia 5% 5% 1 103 Year ended 31 Decem- ber 2018 LLC “Cloudpayments” Russia 45% 45% 34 236 - - The summarised financial information of these subsidiaries was as follows: Current assets Non-cur- rent assets Current liabilities Non-cur- rent liabil- ities In millions of RR Year ended 31 De- cember 2019 Total com- pre-hen- sive LLC “Cloudpayments” 329 301 136 Year ended 31 De- cember 2018 LLC “Cloudpayments” 180 376 43 - - 512 91 91 2 226 30 30 23 37 Financial Derivatives The table below sets out fair values, at the end of the reporting period, of currencies receivable or payable under foreign exchange forwards and swap contracts entered into by the Group . The table reflects gross positions before the netting of any counterparty positions (and payments) and covers the contracts with settlement dates after the end of the respective reporting period . In millions of RR Foreign exchange forwards and swaps: discounted notional amounts, at the end of the reporting period, of - USD receivable on settlement (+) - USD payable on settlement (-) - RR receivable on settlement (+) - RR payable on settlement (-) - EUR receivable on settlement (+) - EUR payable on settlement (-) - GBP payable on settlement (-) Fair value of foreign exchange forwards and swaps 31 December 2019 31 December 2018 Contracts with positive fair value Contracts with negative fair value Contracts with positive fair value Contracts with negative fair value 8,768 (1,570) 1,896 (8,388) - (301) (15) 390 8,888 (2,664) 2,971 (9,474) - (294) (17) (590) 9,373 (1,146) 1,619 (7,666) - (459) (11) 1,710 - (982) 1,360 (596) 596 (370) (11) (3) F-123 F-124 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 38 Fair Value of Financial Instruments (Continued) The description of valuation techniques and the description of the inputs used in the fair value measurement for level 2 meas- urements at 31 December 2019 are as follows: In millions of RR Fair value Valuation technique Inputs used ASSETS AT FAIR VALUE Investments in securities 1,939 Observable quotes for comparable securities adjusted by multiplicator depending on the degree of the market activity Foreign exchange swaps and forwards Total recurring fair value measurements at level 2 LIABILITIES AT FAIR VALUE 390 2,329 Discounted cash flows adjusted for counterparty credit risk Quotes from the automated fair value system for financial instruments of NSD Price Center* Russian rouble curve . USD Dollar Swaps Curve . EUR Swaps Curve . CDS quotes assessment of counterpar- ty credit risk or reference entities . Discounted cash flows adjusted for counterparty credit risk Russian rouble curve . USD Dollar Swaps Curve . EUR Swaps Curve . CDS quotes assessment of counterpar- ty credit risk or reference entities . Foreign exchange swaps and forwards Total recurring fair value measurements at level 2 590 590 The description of valuation techniques and the description of the inputs used in the fair value measurement for level 2 meas- urements at 31 December 2018 are as follows: In millions of RR Fair value Valuation technique Inputs used ASSETS AT FAIR VALUE Observable quotes for comparable securities adjusted by multiplicator depending on the degree of the market activity Discounted cash flows adjusted for counterparty credit risk Quotes from the automated fair value system for financial instruments of NSD Price Center* Russian rouble curve . USD Dollar Swaps Curve . CDS quotes assessment of counterpar- ty credit risk or reference entities . Discounted cash flows adjusted for counterparty credit risk Russian rouble curve . USD Dollar Swaps Curve . CDS quotes assessment of counterpar- ty credit risk or reference entities . Investments in securities 5,493 Foreign exchange swaps and forwards Total recurring fair value measurements at level 2 LIABILITIES AT FAIR VALUE Foreign exchange swaps and forwards Total recurring fair value measurements at level 2 1,710 7,203 3 3 * NSD Valuation Center is a fair value measurement service for bonds and other financial instruments, accredited by the CBRF . There were no changes in the valuation techniques for level 2 recurring fair value measurements during the year ended 31 December 2019 . Level 2 derivatives comprise foreign exchange forwards and swaps . The foreign exchange forwards have been fair valued using forward exchange rates that are quoted in an active market . Foreign exchange swaps are fair valued using forward interest rates extracted from observable yield curves . The effects of discounting are generally insignificant for level 2 derivatives . (b) Assets and liabilities not measured at fair value but for which fair value is disclosed Fair values analysed by level in the fair value hierarchy and carrying value of assets not measured at fair value are as follows: 31 December 2019 31 December 2018 In millions of RR Level 1 Level 2 Level 3 FINANCIAL ASSETS CARRIED AT AMORTISED COST Cash and cash equivalents Carrying value Level 1 Level 2 Level 3 Carrying value - Cash on hand 11,118 - - 11,118 5,839 - - 16,599 - 16,599 - 11,158 - Cash balances with the CBRF (other than mandatory reserve deposits) - Placements with other banks and non-bank credit organizations with original maturities of less than three months Mandatory cash balances with the CBRF Due from other banks Loans and advances to customers Guarantee deposits with payment systems Other financial assets Settlement of operations with plastic cards receivable Other receivables Total financial assets car- ried at amortised cost - - - - - 5,839 11,158 16,805 2,435 776 16,805 2,435 776 - 30,079 - 30,079 - - - - - - 3,448 2,084 - - 3,448 2,084 - 329,340 329,175 - 8,877 8,877 16,384 5,289 - - 16,384 5,289 - - - - - - - - - 199,041 198,489 4,603 4,603 12,694 2,948 - - 12,694 2,948 11,118 73,883 338,217 423,053 5,839 46,816 203,644 255,747 F-125 F-126 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 38 Fair Value of Financial Instruments (Continued) Fair values analysed by level in the fair value hierarchy and carrying value of liabilities not measured at fair value are as fol- lows: 31 December 2019 31 December 2018 In millions of RR Level 1 Level 2 Level 3 FINANCIAL LIABILITIES CARRIED AT AMORTISED COST Carrying value Level 1 Level 2 Level 3 Carrying value 2,708 137,637 100,227 41,702 - 552 798 5,851 3,754 20,644 4,904 3,189 2,041 1,067 - - - - - - - - - - - - - - Due to banks Customer accounts Individuals -Current/demand accounts -Term deposits SME -Current/demand accounts -Term deposits Other legal entities -Current/demand accounts -Term deposits Debt securities in issue RR Bonds issued on domestic market Other financial liabilities Settlement of operations with plastic cards Trade payables Credit related commitments Other financial liabilities Total financial liabilities car- ried at amortised cost - - - - - - - 2,708 137,637 102,829 41,702 - 552 847 663 - 663 211,661 139,114 - 211,661 - 137,292 - - - - - - - 60,174 1,879 495 112 60,174 1,880 495 112 - - - - - - - - - - 6,427 4,621 - 1,358 - - - - 6,427 4,621 2,242 1,358 - - - - 4,904 3,189 - 1,067 Euro-Commercial Paper - 2,460 Subordinated debt 24,442 - 23,618 5,919 - 2,460 - 3,754 Perpetual subordinated bonds 19,604 - - 18,487 20,505 - 44,046 428,964 - 471,490 26,424 299,189 - 325,074 Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by an active quoted market price . Where quoted market prices are not available, the Group used valuation techniques . The fair value of floating rate instruments that are not quoted in an active market was estimated to be equal to their carrying amount . The fair value of unquoted fixed interest rate instruments was estimated based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity . As at 31 December 2019 and 31 December 2018 the fair value of the debt securities in issue and subordinated debt has been calculated based on quoted prices from the Moscow Exchange MICEX-RTS and Global Exchange Market, where the Group’s debt securities are listed and traded . Weighted average discount rates used in determining fair value as of 30 December 2019 and 2018 are disclosed below: In % p.a. Assets Cash and cash equivalents Due from other banks Loans and advances to customers Investments in securities Repurchase receivables Liabilities Due to banks Customer accounts Debt securities in issue Subordinated debt 31 December 2019 31 December 2018 0 .0 5 .2 37 .2 4 .9 - 0 .2 3 .9 7 .5 6 .8 0 .0 5 .9 42 .7 5 .5 4 .3 6 .0 4 .4 7 .6 9 .8 39 Presentation of Financial Instruments by Measurement Category For the purposes of measurement, IFRS 9 “Financial Instruments” classifies financial assets into the following categories: (a) financial assets at FVTPL; (b) financial assets at FVOCI and (c) financial assets at AC . Financial assets at FVTPL have two sub-categories: (i) assets measured at FVTPL mandatorily, and (ii) assets designated as such upon initial recognition . The following table provides a reconciliation of classes of financial assets with these measurement categories as of 31 Decem- ber 2019: In millions of RR Cash and cash equivalents - Cash on hand - Cash balances with the CBRF (other than mandatory reserve deposits) - Placements with other banks and non-bank credit organizations with original maturities of less than three months Mandatory cash balances with the CBRF Due from other banks Loans and advances to customers Financial derivatives Guarantee deposits with payment systems Investment in securities Other financial assets AC FVTPL FVOCI Total 11,118 16,599 30,079 3,448 2,084 329,175 - 8,877 - - - - - 390 - - - - - - - - 11,118 16,599 30,079 3,448 2,084 329,175 390 8,877 - 413 134,765 135,178 - Settlement of operations with plastic cards receivable - Other receivables TOTAL FINANCIAL ASSETS 16,384 5,289 - - - - 16,384 5,289 423,053 803 134,765 558,621 F-127 F-128 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 39 Presentation of Financial Instruments by Measurement Category (Continued) The following table provides a reconciliation of classes of financial assets with these measurement categories as of 31 Decem- ber 2018: 40 Related Party Transactions Parties are generally considered to be related if the parties are under common control or one party has the ability to control the other party or can exercise significant influence over the other party in making financial or operational decisions . In consid- ering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form . The outstanding balances with related parties were as follows: FVTPL (man- datory) AC FVOCI Total In millions of RR Cash and cash equivalents - Cash on hand - Cash balances with the CBRF (other than mandatory re- serve deposits) - Placements with other banks and non-bank credit organiza- tions with original maturities of less than three months Mandatory cash balances with the CBRF Due from other banks Loans and advances to customers Financial derivatives 5,839 11,158 16,805 2,435 776 198,489 - - - - - - - 1,710 - - - - - - - - 5,839 11,158 16,805 2,435 776 198,489 1,710 4,603 Guarantee deposits with payment systems 4,603 - Investment in debt securities Repurchase receivables Other financial assets - Settlement of operations with plastic cards receivable - Other receivables TOTAL FINANCIAL ASSETS - - 12,694 2,948 5,666 94,474 100,140 - - - 1,182 1,182 - - 12,694 2,948 255,747 7,376 95,656 358,779 As of 31 December 2019 and 2018 all of the Group’s financial liabilities except derivatives were carried at amortised cost . In millions of RR ASSETS Gross amounts of loans and advances to customers (contrac- tual interest rate: 11 .7-25 .7% (31 December 2018: 11 .7- 27 .8%)) Other financial assets TOTAL ASSETS LIABILITIES Customer accounts (contractual interest rate: 0 .5-7 .2% (31 December 2018: 3 .8-4 .2% p .a .)) Debt securities in issue (yield: 1 .0-3 .6% (31 December 2018: 1 .3-9 .5%)) Other non-financial liabilities TOTAL LIABILITIES EQUITY Share-based payment reserve 31 December 2019 31 December 2018 Key management personnel Other related parties Key management personnel Other related parties 437 - 437 150 843 993 9 - 9 100 431 531 1,779 227 1,349 905 - 2,460 521 - - 888 3,754 - 2,300 2,687 2,237 4,659 - Management long-term incentive program TOTAL EQUITY 930 930 - - 1,102 1,102 - - Other related parties in the tables above are represented by entities which are under control of the Group's ultimate con- trolling party Oleg Tinkov . The income and expense items with related parties were as follows: In millions of RR Interest income calculated using the effective interest rate method Interest expense calculated using effective interest rate method Net gains/(losses) from foreign exchange translation Other operating income 2019 2018 Key man- agement personnel Other related parties Key man- agement personnel Other related parties 2 27 3 - (64) (101) (46) (165) - - 31 49 - - F-129 Administrative and other operating expenses (1,913) (173) (2,273) (69) 18 (89) F-130 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Consolidated Financial Statements (Continued) 40 Related Party Transactions (Continued) Key management compensation is presented below: In millions of RR Short-term benefits: - Salaries - Short-term bonuses Long-term benefits: - Management long-term incentive programme Total 2019 2018 906 586 421 1,913 792 917 564 2,273 Management long-term incentive program. On 31 March 2016 the Group introduced a MLTIP as both a long-term incentive and a retention tool for the management of the Group . On 15 January 2019 the Group granted GDRs to new participants in MLTIP which resulted the total number of GDRs attributa- ble to the Management of 9,940 thousand as at 31 December 2019 (31 December 2018: 9,849 thousand) . Participants of the program receive the vested parts of their grants provided that they are employed by the Group during the vesting period . Participants are entitled to the dividends, if any . Participants who leave the Group lose their right for the unvested parts of the grants . The fair value of the awards as at grant dates (31 March 2016, 8 February 2017, 22 February 2018 and 15 January 2019) is determined on the basis of market quotes of GDRs as at those dates . Each grant is divided into 4 equal awards, each award is vested during 4 years in delivered equal tranches . The delivery dates as of which the GDRs are allowed to be sold by the participants correspond to the vesting dates at 14 April 2016 and each subsequent 31 March (with exception of 2019 when the vesting date for all participants was 31 January 2019) until 2022 for participants joining in 2016, until 2023 for participants joining in 2017, then until 2024 for participants joining in 2018, and until 2025 for participants joining in 2019 . The following table disclose the changes in the numbers of GDRs attributable to the MLTIP between the beginning of the pro- gram and the end of the reporting period: In thousands Granted during the year Vested during the year At 31 December 2016 Granted during the year Vested during the year Forfeited during the year At 31 December 2017 Granted during the year Vested during the year Forfeited during the year At 31 December 2018 Granted during the year Vested during the year Forfeited during the year At 31 December 2019 Number of GDRs attributable to the MLTIP 7,425 (464) 6,961 2,270 (1,326) (60) 7,845 154 (1,805) (16) 6,178 91 (2,419) (68) 3,782 41 Events after the End of the Reporting Period In February 2020 the Group announced plans to invest in a new venture project to set up a fintech company providing a range of services to retail customers in Europe (excluding CIS) . The startup will offer non-credit financial products . The project is due to launch in 2020, with the Company as its key seed investor . The Company will have a controlling interest in the new venture . The Company's initial commitment is up to Euro 25 million and will be contributed in tranches as the venture develops . On 10 March 2020 the Board of Directors declared an interim dividend in line with the current dividend policy of USD 0 .21 per share/per GDR with a total amount allocated for dividend payment of around USD 41 .9 million . F-131 F-132 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 Board of Directors and other officers Board of Directors Constantinos Economides, Chairman Alexios Ioannides Mary Trimithiotou Jacques Der Megreditchian Martin Robert Cocker The above all served throughout 2019 and through to the date of these separate financial statements . Philippe Delpal retired from the Board on 16 August 2019 . The Company’s Articles of Association include regulations for the retirement by rotation of Directors at each annual general meeting . These regulations will operate in 2020 on the basis of the composition of the Board at the relevant date . Company Secretary Caelion Secretarial Limited 25 Spyrou Araouzou Berengaria 25, 5th floor, 3036, Limassol, Cyprus Registered office 25 Spyrou Araouzou Berengaria 25, 5th floor, 3036, Limassol, Cyprus 31 DECEMBER 2019 TCS Group Holding PLC International Financial Reporting Standards Separate Financial Statements and Independent Auditor’s Report Contents Board of Directors and other officers . . . . . . . . . . . . . . . . . F-134 17 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-179 Management Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-135 18 Reconciliation of Liabilities Arising from Financing Independent Auditor’s Report . . . . . . . . . . . . . . . . . . . . . . . F-143 SEPARATE FINANCIAL STATEMENTS Separate Statement of Financial Position . . . . . . . . . . . . . . F-151 Separate Statement of Profit or Loss and Other Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-152 Separate Statement of Changes in Equity . . . . . . . . . . . . . F-153 Separate Statement of Cash Flows . . . . . . . . . . . . . . . . . . . F-154 Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-180 19 Financial Risk Management . . . . . . . . . . . . . . . . . . . . . . . F-180 20 Contingencies and Commitments . . . . . . . . . . . . . . . . . F-187 21 Fair Value of Financial Instruments . . . . . . . . . . . . . . . . F-187 22 Presentation of Financial Instruments by Measurement Category . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-191 23 Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . F-192 24 Events after the End of the Reporting Period . . . . . . . F-194 NOTES TO THE SEPARATE FINANCIAL STATEMENTS 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-155 2 Operating Environment of the Company . . . . . . . . . . . F-157 3 Significant Accounting Policies . . . . . . . . . . . . . . . . . . . F-158 4 5 Critical Accounting Estimates and Judgements in Applying Accounting Policies . . . . . . . . . . . . . . . . . . . . . F-169 Adoption of New or Revised Standards and Interpretations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-170 6 New Accounting Pronouncements . . . . . . . . . . . . . . . . . . F-171 7 Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . F-171 8 Loans and Deposit Placements with Related Parties F-172 9 Investments in Equity Securities . . . . . . . . . . . . . . . . . . F-173 10 Loans Received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-174 11 Debt Securities in Issue . . . . . . . . . . . . . . . . . . . . . . . . . . F-175 12 Other Financial and Non-financial Liabilities . . . . . . . F-175 13 Share Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-176 14 Interest income and expense . . . . . . . . . . . . . . . . . . . . . F-177 15 Administrative and Other Operating Expenses . . . . . F-177 16 Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-178 F-133 F-134 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Management Report 1 . The Board of Directors presents its report together with the audited separate financial statements of TCS Group Holding PLC (the “Company”) for the year ended 31 De- cember 2019 . Principal activities and nature of operations of the Company 2 . The principal activities of the Company are holding of investments in subsidiary companies operating in the Russian Federation and offering call center services to customers and potential customers in the Russian Federation following the launch of Cyprus based home call center . The main subsidiaries are JSC “Tinkoff Bank” (the “Bank”), JSC “Tinkoff Insurance” (the “Insurance company”), LLC “Phoenix”, LLC “CloudPayments”, LLC “Тinkoff Mobile”, Tinkoff Software DC, LLC “Fintech DC” and LLC “Tinkoff Capital” (the Company and its subsidiar- ies collectively the “Group”) . Refer to Note 1 . 3 . The Bank specialises in retail banking for individuals, individual entrepreneurs (“IE”), small and medium-sized enterprises (“SME”) and brokerage services . The Bank, which is fully licensed by the Central Bank of Russia, launched its operations in the Summer of 2007 and is a member of the Russian Deposit Insurance System . The Insurance Company specialises in providing non-life insurance coverage such as accident, property, travel, credit protection and auto insurance . LLC “Phoenix” is a debt collection agency . LLC “CloudPayments” is a developer of online payment solutions whose core business is online merchant acquiring in Russia . LLC “Tinkoff Mobile” is a mobile virtual network operator set up in 2017 to provide mobile services . Tinkoff Software DC provides software development services to the Group . The founder and controlling shareholder of the Company is Oleg Tinkov . primary customer acquisition channels are Internet and Mobile, but it also uses Direct Sales Agents and part- nerships (co-brands) to acquire new customers . These customer acquisition models, combined with the Bank’s virtual network, afford it a geographic reach across all of Russia’s regions resulting in a highly diversified portfolio . 6 . During 2019 the Company completed a secondary public offering (“SPO”) of its “class A” shares in the form of Global Depositary Receipts (GDRs) raising by RR 18,916 million (USD 300 million) gross of costs . This provides ad- ditional necessary capital to take advantage of profitable growth opportunities whilst maintaining sufficient capital buffers for the future (Note 1 and 13) . 7 . The key offerings of JSC “Tinkoff Insurance” are personal accident insurance, collective insurance against accidents and illnesses, travel insurance, motor vehicle insurance and property insurance, compulsory third party liability in- surance (CTP) and voluntary third party liability insurance (VTP) . The Insurance Company focuses on online sales . 8 . The profit of the Company for the year ended 31 December 2019 was RR 15,816 million (2018: loss of RR 23 million) . On 31 December 2019 the total assets of the Company were RR 263,567 million (2018: RR 222,216 million) and the net assets were RR 260,273 million (2018: RR 193,046 million) . On 20 December 2019 the Company issued two tranches of Euro-Commercial Paper (ECP) denominated in USD and EUR maturing on 20 November 2020 . The USD denominated ECP has a nominal value of USD 10 million with a discount of 3 .6% and the EUR denominated ECP has a nominal value of EUR 15 million with a discount of 1 .0% . On 19 February 2019 the Company issued Euro-Commercial Paper (ECP) denominated in EUR maturing on 18 February 2020 with a nominal value of EUR 12 million and at a discount of 1 .25% . During 2019 the Company distributed dividends in accord- ance with its dividend policy in the amount of RR 5,856 million (2018: RR 12,265 million) . Review of developments, position and performance of the Company’s business 4 . During 2019 the Company actively continued the de- velopment of its call center and software development services in Cyprus . The Company continues to increase its call center work force, providing training so that these employees can provide services to Tinkoff Bank and, indi- rectly, its customers . 5 . The Bank operates a flexible business model . Its virtual network enables it to quickly and easily increase business or slow down customer acquisition depending upon the availability of funding and market conditions . The Bank’s Environmental matters 9 . As the Group, and, by extension the Company is an online-only financial institution, the management of the Company believes that none of the Company’s business relationships, products or services are likely to have any significant actual or potential significant environmental impacts and do not believe its operations are exposed to any material environmental risks . Management, in reach- ing this view, have taken into account the risk of adverse impacts that may stem from the Company’s own activities as well as its business relationships including its supply and subcontracting chains . This belief is based on continu- ous scrutiny of the business . The Company is continuously reviewing its processes to identify opportunities to reduce their environmental impact . Human resources 10 . Empowerment is an important ingredient in the success of our organization . To achieve this, decision making is delegated to the levels deep below the management team; discussion, idea generation and exchange and transparency is actively promoted and encouraged; and an open leadership style ensures that information can move freely . The Company utilizes all types of forums to promote continual dialogue – such as email, online chat rooms, flash meetings, as well as formalized meeting structures . The Company offers a clear far-reaching ca- reer path for its employees, a unique work environment and a fair and transparent compensation . 11 . Clear performance evaluation processes and fair com- pensation are essential . Compensation is a combination of fixed rate salary and supplemental bonuses and is based on employee performance . Employees are evaluat- ed on a regular basis in order to monitor their achieve- ment against their Key Performance Indicators as well as to provide feedback which can be used for their career development and to determine incentive compensation . 12 . Prior to its IPO in 2013, the Company set up share-based management long term incentive plans (‘MLTIP’) as retention and motivational tools for key and senior man- agers of the Company’s subsidiaries . In March 2016, the Company announced a consolidated long-term manage- ment incentive and retention plan, covering around 50 key, senior and middle managers . Since then the number of participants has increased to over 80 . Total size of the MLTIP pool is 5 .4% of the Company’s share capital as at 31 December 2018 before the SPO (Note 13) . The plan is designed to align more closely managers’ interests with those of shareholders to grow the Company's value . The plan is awarded over four years with each such annual award vesting over the subsequent three years . The Company believes that participation in its share capital is an effective motivation and retention tool . The new management incentive and retention plan now embraces more managers, for two main reasons: firstly, internal promotions as some employees were promoted to key managerial positions; and, secondly, as part of its ex- pansion and transformation into a financial marketplace, the Bank and other companies of the Group have hired a significant number of new managers to develop and manage new business lines and to strengthen internal controls, including cyber security . Non-Financial Information and Diversity Statement 13 . The Company’s policies and other information that pro- vide an understanding of the development, performance, position and impact of the Company’s activities in the areas of environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters can be found in the Company’s most recently published Non-Financial Information and Diversity Statement . The Company will publish its Non-Financial Information and Diversity Statement for the year ended 2019, on the Company’s website, www .tcsgh .com .cy (and www .tinkoff .ru/eng) no later than 30 June 2020 . Principal risks and uncertainties 14 . The Company’s business and financial results are impact- ed by the uncertainties and volatilities in the Russian economic environment which can be impacted by global factors and/or by national factors . 15 . The Company’s subsidiaries and the Company on its own are subject to a number of principal risks which might ad- versely impact its performance . The principal activities of the Company through its subsidiaries are banking and insurance operations and so it is within this area that the principal risks occur . Management considers that those principal risks are: financial risks, operational risks and legal risks . Financial risks comprise market risks (includ- ing currency risk, interest rate risk and other price risk), credit risk and liquidity risk . 16 . The Board has put in place arrangements to identify, evaluate and manage the principal risks and uncer- tainties faced by the Company . The Company has an established risk management program that focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company's financial performance . This is overseen by a dedicated Risk Management function, which works with senior management of the operating companies in Russia as well as the Board of Directors in this area . The primary objectives of the financial risk management function are to establish acceptable risk limits, and then ensure that the exposures remain within these limits . The operation- al and legal risk management functions are intended to ensure the proper functioning of internal policies and procedures that minimize operational and legal risks . The risk management strategy is established so as to identify, assess, monitor and manage the risks arising from Company's and subsidiaries’ activities . These risks as well as other risks and uncertainties, which affect the Company and how these are managed, are presented in Notes 19 and 20 of the separate financial statements . F-135 F-136 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Management Report (Continued) 17 . In addition, late in 2019, news first emerged from China about the COVID-19 (Coronavirus) . At the end of 2019 a limited number of cases of an unknown virus had been reported to the World Health Organisation . In the first few months of 2020 the virus had spread globally resulting in an announcement of pandemic status by the World Health Organization in March 2020 . Responses put in place by many countries to contain the spread of COVID-19 are resulting in significant operational disruption for many companies and have had a significant impact on global financial markets . As the situation is rap- idly evolving it may have a significant effect on the busi- ness of many companies across a wide range of sectors, including, but not limited to such impacts as disruption of business operations as a result of interruption of pro- duction or closure of facilities, supply chain disruptions, quarantines of personnel, reduced demand and difficulties in raising financing . In addition, the Company’s subsidiar- ies may face the increasingly broad effects of COVID-19 as a result of its negative impact on the global economy and major financial markets . The significance of the impact of COVID-19 on the subsidiaries’ business largely depends on the duration and the incidence of the pandemic effects on the world and Russian economy . Management consid- ers this outbreak to be a non-adjusting post balance sheet event . While this is still an evolving situation at the time of issuing these separate financial statements, to date there has been no discernible impact on the Group's business, however the future effects cannot be predicted . As the situation is rapidly evolving, we do not consider it is prac- ticable at present to determine a quantitative estimate of the potential impact of this outbreak on the Group . Management will continue to monitor the potential impact and will take steps to mitigate any effects where required . Further discussion of the potential impact on the Group of COVID 19 together with the responses of management are detailed in Note 2 . Results 20 . The Company’s results for the year are set out on page 2 of the separate financial statements . Information on distribution of profits is presented in Note 17 . Any important events for the Company that have occurred after the end of the financial year 21 . Important events for the Company that have occurred after the end of the financial year are presented in Note 24 . Share capital 22 . In June 2019 the Company’s shareholders approved a resolution to increase the authorised share capital to USD 8,401,385 .92 by the creation of 18,263,882 new undesig- nated ordinary shares of nominal value USD 0 .04 each . At 31 December 2019 the total number of authorised shares is 210,034,648 shares (31 December 2018: 191,770,766 shares) with a par value of USD 0 .04 per share (31 Decem- ber 2018: USD 0 .04 per share) . 23 . On 2 July 2019 the Company completed a SPO on the London Stock Exchange plc and issued 16,666,667 “Class A” shares of the Company in the form of GDRs at a price of USD 18 .00 per GDR (RR 1,135 per GDR), raising aggregate gross proceeds of USD 300 million (RR 18,916 million) which would ensure the necessary capital to seize the current profitable growth opportunities whilst maintaining ample capital buffers in the future . 24 . As at 31 December 2019 the number of issued “class A” shares is 119,291,268 and issued “class B” shares is 80,014,224 (31 December 2018: the number of issued “class A” shares is 96,239,291 and issued “class B” shares is 86,399,534) . Contingencies 18 . The Company’s contingencies are disclosed in Note 20 to the separate financial statements . Future developments 19 . The strategic objective for the Group and so, by exten- sion, the Company is to be a full service, online financial and lifestyle ecosystem with a broad range of financial, insurance and quasi-financial products, serving custom- ers through a high-tech online and mobile platform that offers premium quality service and convenience, while maintaining high growth rates, profitability and effective data-driven risk management . Research and development activities 25 . The Company has not undertaken any significant research and development activities during the year ended 31 December 2019 though it continues to identify opportunities and ways to further develop its business in line with its strategic objective as set out above . Treasury shares 26 . At 31 December 2019 the Group held 4,185,166 (2018: 6,604,353 ) of its own GDRs, equivalent to approximate- ly RR 3,164 million (2018: RR 3,670 million) and which represent 2 .1% (2018: 3 .6%) of the issued shares . 27 . Treasury shares are GDRs of TCS Group Holding PLC that are held by a special purpose trust which has been specif- ically created for the long-term incentive programme for the management of the Company’s subsidiaries (MLTIP) (see Note 23 for further information) . 28 . In 2019, the Company repurchased no GDRs (2018: the Company repurchased 2,094,126 GDRs at market price for RR 2,455 million representing 1 .1% of the issued share capital) . 29 . During 2019 the Company transferred 2,419,187 GDRs (2018: 1,804,894 GDRs), representing 1 .21% (2018: 1 .0%) of the issued shares, upon vesting under the MLTIP . This resulted in a transfer of RR 506 million (2018: RR 372 million) out of treasury shares to retained earnings . Board of Directors 30 . The members of the Board of Directors as of 31 Decem- ber 2019 and at the date of this report are presented above . All served throughout the year ended 31 De- cember 2019 and through to the date of these separate financial statements, except from Philippe Delpal, who retired from the Board on 16 August 2019 . 31 . There were no significant changes in the assignment of responsibilities and remuneration of the Board of Directors . Branches 32 . The Company did not operate through any branches during the year . Independent auditor 33 . The Independent Auditor, PricewaterhouseCoopers Lim- ited, has expressed its willingness to continue in office . A resolution giving authority to the Board of Directors to fix its remuneration will be proposed at the Annual General Meeting . Going concern 34 . Directors have access to all information necessary to exercise their duties . The Directors continue to adopt the going concern basis in preparing the separate financial statements based on the fact that, after making enquir- ies and following a review of the Company’s budget for 2020, including cash flows and funding facilities, the Directors consider that the Company has adequate resources to continue in operation for the foreseeable future . This assessment was made with the available information to the Company as at the date of approving the financial statements . Crporate Governance Statement GDRs of TCS Group Holding PLC, with each GDR issued under a deposit agreement dated on or about 24th October 2013 with JPMorganChase Bank N .A . as depositary representing one Class A share, are listed on the London Stock Exchange . The Company’s GDRs are also listed on the Moscow Exchange . No shares of TCS Group Holding PLC are listed on any exchange . The Company is required to comply with the UK corporate governance regime to the extent it applies to foreign issuers of GDRs listed on the London Stock Exchange . The Company has not adopted corporate governance measures of the same standard in all respects as those adopted by UK incorporated companies or companies with a premium listing on the London Stock Exchange . As the Class A shares themselves are not listed on the Cyprus Stock Exchange (or elsewhere), the Cypriot corporate govern- ance regime, which only relates to companies that are listed on the Cyprus Stock Exchange, does not apply to the Company and accordingly the Company does not monitor its compliance with that regime . The Company’s Home State is Cyprus . A description of the terms and conditions of the GDRs can be found at ‘Terms and Conditions of the Global Depositary Receipts’, ‘Sum- mary of the Provisions relating to the GDRs whilst still in Master Form’ and ‘Description of Arrangements to Safeguard the Rights of the Holders of the GDRs’ in the Prospectus issued by the Company dated 22 October 2013 and on the website at www .tinkoff .ru/eng . Refer to Note 1 for the description of the rights of each class of shares . Copies of the Articles of Association of the Company adopted on 21 October 2013, the terms of reference of the Committees, and other corporate governance related as well as investor relations related materials can also be found on the website www .tinkoff .ru/ eng, at the Company’s main website (www .tcsgh .com .cy), on the Company’s page on the London Stock Exchange website (www . londonstockexchange .com/exchange/prices-and-markets/stocks/ summary) and at the official site of the Department of Registrar of Companies, Cyprus (http://www .mcit .gov .cy/) . F-137 F-138 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Management Report (Continued) Board of Directors Committees of the Board of directors The role of the Board is to provide entrepreneurial leadership to the Company within a framework of prudent and effective controls which enables risk to be assessed and managed . The Board sets the Company’s strategic objectives, ensures that the necessary financial and human resources are in place for the Company to meet its objectives and reviews manage- ment’s performance . The Board also sets the Company’s val- ues and standards and ensures that its obligations towards the shareholders and other stakeholders are understood and met . The Board operates under a formal schedule of matters reserved to the Board for its decision, approved by share- holders in 2013 . The authorities of the members of the Board are specified by the Articles of Association of the Company and by law . The current five strong Board of Directors is comprised of three executive directors including the chairman, and two non-ex- ecutive directors both of whom are independent . Other than the retirement of Mr . Philippe Delpal on 16 August 2019, there was no change in the composition of the Board or sta- tus of the directors in 2019 . The Board of Directors currently contains no B Directors . The longest serving director is Mr . Constantinos Economides who became a director in 2008, and later took over the role of Chairman of the Board of Directors in June 2015 . The names of the people who served on the Board during 2019 are listed at Board of Directors and other officers . The Company has established two Committees of the Board . Specific responsibilities have been delegated to those com- mittees as described below . The Board is required to undertake a formal and rigorous review annually of its own performance, that of its commit- tees and of its individual directors . That review was recently carried out, in-house, in relation to 2019, looking at overall performance . All directors completed detailed question- naires on the Board’s, the committees’ and the individual director’s performance . Analysis of the resultant feedback was discussed at a meeting of the Board of Directors on 10 March 2020, and there were no changes in the performance of the Board, its committees or individual directors . The Board has not appointed a senior independent director . There are only two independent directors of whom at least one will retire each year . The role of appraising the Chairman of the Board for FY2019 was performed by the Chairman of the Audit Committee . The Company has established two Committees of the Board of Directors: the Audit Committee and the Remuneration Committee . Their terms of reference are summarized below . Both Committees were formed in October 2013 . The Board reserves the right to amend their terms of reference and arranges a periodic review of each Committee’s role and ac- tivities and considers the appropriateness of additional committees . Committees - current composition The Audit Committee is chaired by an independent non-ex- ecutive director Mr Martin Cocker, and had, until 16 August 2019, two other members both non-executive directors, one of whom was independent . From 16 August 2019 the Audit Committee has comprised of its chairman Mr Martin Cocker and one independent non-executive director . The Remuneration Committee is also chaired by an independ- ent non-executive director, Mr Jacques Der Megreditchian, and had until 16 August 2019 two other members both non-executive directors, one of whom was independent . From 16 August 2019 the Remuneration Committee has comprised of its chairman Mr Jacques Der Megreditchian and one independent non-executive director . The current terms of reference of both Committees are avail- able to the public and can be found on the Group’s website . A short summary of both is set out below . Role of the Audit Committee The Audit Committee’s primary purpose and responsibility is to assist the Board in its oversight responsibilities . In execut- ing this role the Audit Committee monitors the integrity of the separate financial statements of the Company prepared under International Financial Reporting Standards (“IFRS”) and any formal announcements relating to the Group’s and the Company’s financial performance, reviewing significant fi- nancial reporting judgments contained in them, oversees the financial reporting controls and procedures implemented by the Company and monitors and assesses the effectiveness of the Company’s internal financial controls, risk management systems, internal audit function, the independence and qual- ifications of the independent auditor and the effectiveness of the external audit process . The Audit Committee is required to meet at appropriate times in the reporting and audit cycle but in practice meets more often as required . Under its terms of reference, the Audit Committee is required, at least once each year, to review its own perfor- mance, constitution and terms of reference to ensure it is operating at maximum effectiveness and to recommend any changes it considers necessary for Board approval . The Audit Committee met this obligation through members participating in the main Board review described above . After consideration of the review, no changes were proposed to the committee’s terms of reference . The Audit Committee operates a structured framework around the extensive work it does on non-financial statement matters holding at least two additional meetings annually, at least one of which would be held at the Bank’s head office in Moscow, to consider spe- cific, non-financial statement related areas within its terms of reference . One such meeting was held in 2019 with a further two are planned for 2020 . The Audit Committee has developed a risk matrix which con- stantly evolves to reflect new risks, the perceived impact of, and the Group’s appetite for, any given risk and the measures taken to mitigate those risks . This matrix is run in conjunc- tion with the internal audit function . A new post of chief information security officer was created in late 2017 and filled, with additional personnel expert in cy- ber-security recruited, in a very competitive market, through 2018 and 2019 to support the Group’s ever-increasing efforts to stay ahead of trends and threats in this sphere . The Group has further broadened its top management team with a new chief investment officer and new chief operating officer appointed in 2020 and now in place . Role of the Remuneration Committee The Remuneration Committee is responsible for determin- ing and reviewing among other things the framework of remuneration of the executive directors, senior management and its overall cost and the Group’s remuneration policies . The objective is to ensure that the executive management of the Company are provided with appropriate incentives to encourage enhanced performance and are in a fair and responsible manner rewarded for their individual contri- butions to the success of the Company . The Remuneration Committee’s Terms of Reference include reviewing the design and determining targets for any performance related pay schemes and reviewing the design of all share incentive plans for approval by the Board . The Remuneration Commit- tee is required to meet at least twice a year but in practice meets far more often . The Remuneration Committee continued with its work into 2019 on its ongoing review of the operation of the Com- pany’s MLTIP which launched in 2016 and in considering additional awards to both existing and new participants for this and subsequent years . The Remuneration Committee recommended 10 members of management be invited to join MLTIP in Q1 2019, but made no such recommendations in Q1 2020 . The Committee has also been working on plans for an incen- tive and compensation plan to supplement MLTIP for when, in the period 2022 to 2024, existing awards made to MLTIP joiners in 2016-2017 start to enter into run off . Under its terms of reference the Remuneration Committee is required at least once each year to review its own perfor- mance, constitution and terms of reference to ensure it is operating at maximum effectiveness and to recommend any changes it considers necessary for Board approval . The Remuneration Committee met this obligation through members participating in the main Board review (described above) under which detailed questionnaires were complet- ed by all directors assessing the operation of the Board and both committees as well as individual directors . Although earlier reviews had resulted in certain minor changes to the Remuneration Committee’s terms of reference, no further changes were felt required based on the most recent review . The Committee continues to meet as required . In 2019 it convened 5 times . Appointment, retirement, rotation and removal of directors The directors of the Company are appointed by the general meeting of shareholders with the sanction of an ordinary resolution . Such an appointment may be made to fill a vacancy or as an additional director . But no director may be appointed unless nominated by the Board of Directors or by a committee duly authorized by the Board of Directors or by a shareholder or shareholders together holding or repre- senting shares which in aggregate constitute or represent at least 5% in number of votes carried or conferred by the shares giving a right to vote at a general meeting . Notwithstanding that, one or more Directors B (a special category of director) may be appointed only by Class B shareholders, together holding or representing Class B shares which constitute or represent in aggregate over 50% in nominal capital paid up on the Class B shares upon serving notice to the Company . The Board of Directors may at any time appoint any person to the office of director either to fill a vacancy or as an addi- tional director and every such director shall hold office only until the next following annual general meeting and shall not be taken into account in determining the directors who are to retire by rotation . F-139 F-140 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Management Report (Continued) One third of the directors (or if their number is not a multiple of three, the number nearest to three but not exceeding one- third) shall retire by rotation at every annual general meeting . Directors holding an executive office and Directors B are excluded from retirement by rotation . Directors including Directors B may be removed from office by the shareholders at a general meeting with the sanction of an ordinary resolution, subject to giving 28 days’ notice to that director in accordance with the Articles of Association . Directors B may at any time be removed from office by Class B shareholders together holding or representing Class B shares which constitute or represent over 50% in nominal capital paid up on the Class B Shares upon giving notice to the Company . The office of director shall be vacated if the director: • becomes bankrupt or makes any arrangement or compo- sition with his creditors generally; or • becomes prohibited from being a director by reason of any court order made under Section 180 (disqualifica- tion from holding the position of director on the basis of fraudulent or other conduct) of the Cyprus Companies Law; or • becomes, or may be, of unsound mind; or • resigns his office by notice in writing to the Company left at the registered office; or • is absent from meetings of the Board for six consecutive months without permission of the Board of Directors and his alternate director (if any) does not attend in his place and the Board of Directors resolves that his office be vacated . At any time when Class B Shares cease to exist by virtue of conversion into Class A Shares, each Director B shall thereby become (undesignated) a director and shall remain in office until the next annual general meeting and such director will not be taken into account in determining the directors who are to retire by rotation at such meeting . Significant direct/indirect holdings For the significant direct and indirect shareholdings held in the share capital of the Company, please refer to Note 1 of the separate financial statements . Internal control and risk management systems in relation to the financial reporting process Policies, procedures and controls exist around financial reporting . Management is responsible for executing and assessing the effectiveness of these controls . Financial reporting process The Board of Directors is responsible for the preparation of the separate financial statements in accordance with IFRS as adopted by the European Union and the requirements of the Cyprus Companies Law, Cap .113, and for such internal control as the Board of Directors determines is necessary to enable the preparation of separate financial statements that are free from material misstatement, whether due to fraud or error . In prepar- ing the separate financial statements, the Board of Directors is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so . The Board has delegated to the Audit Committee the responsi- bility for reviewing the separate financial statements to ensure that they are in compliance with the applicable framework and legislation and for recommending these to the Board for approval . The Audit Committee is responsible for overseeing the Compa- ny’s financial reporting process . Internal Controls and Risk Management Management is responsible for setting the principles in relation to risk management . The risk management organisation is divided between Policy Making Bodies and Policy Implementation Bodies . Policy Making Bodies are responsible for establishing risk man- agement policies and procedures, including the establishment of limits . The main Policy Making Bodies are the Board of Directors, the Management Board, the Finance Committee, the Credit Committee and the Business Development Committee . In addition the Company has implemented an online analytical processing management system based on a common SAS data warehouse that is updated on a daily basis . The set of daily reports includes but is not limited to sales reports, application processing reports, reports on the risk characteristics of the card portfolios, vintage reports, transition matrix (roll rates) reports, reports on the pre-, early and late collections activities, reports on compliance with CBR requirements, capital adequacy and liquidity reports, operation- al liquidity forecast reports and information on intra-day cash flows . Diversity policy The Company is committed to offering equal opportunity to all current and prospective employees, such that no applicant or employee is discriminated in favour of or against on the grounds of sex, racial or ethnic origin, religion or belief, disability, age or sexual orientation in recruitment, training, promotion or any other aspect of employment . Recruitment, training and promo- tion are exclusively based on merit . All the Company’s and the Group’s employees involved in the recruitment and management of staff are responsible for ensuring the policy is fairly applied within their areas of responsibility . The Company applies this approach throughout, at all levels . This includes its administrative, management and supervisory bodies, including the Board of Directors of the Company . The composition and diversity information of the Board of Directors of the Company for the year ended and as at 31 December 2019 is set out below: Name Age Male/Female Educational/professional background Constantinos Economides 44 Male Alexios Ioannides 43 Male Mary Trimithiotou 42 Female Martin Robert Cocker 60 Male Philippe Delpal (resigned on 16 August 2019) Jacques Der Megreditchian 46 60 Male Male ICAEW, MSc in Management Sciences, experience in ‘Big Four’ professional services firms ICAEW, ICPAC, BSc in Business Administration, experience in ‘Big Four’ professional services firms ICPAC, FCCA, Licensed insolvency practitioner, experience in ‘Big Four’ professional services firms ICAEW, BSc in Mathematics and Economics, experience in ‘Big Four’ professional services firms BSc in IT, Telecoms and Economics, senior executive experi- ence in banking industry BSc in Business Administration and in Financial Analysis, banking and finance experience Further details of the corporate governance regime of the Company can be found on the website: https://www .tinkoff .ru/eng/investor-relations/corporate-governance/ . By Order of the Board Constantinos Economides Chairman of the Board Limassol 9 April 2020 F-141 F-142 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019F-143 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Separate Statement of Financial Position Separate Statement of Profit or Loss and Other Comprehensive Income Note 31 December 2019 31 December 2018 In millions of RR Note 2019 2018 In millions of RR ASSETS Cash and cash equivalents Loans and deposit placements with related parties Financial derivatives Tangible fixed assets and right-of-use assets Investments in debt securities Investments in equity securities Other financial assets Other non-financial assets TOTAL ASSETS LIABILITIES Loans received Debt securities in issue Financial derivatives Deferred income tax liabilities Other financial liabilities Other non-financial liabilities TOTAL LIABILITIES EQUITY Share capital Share premium Treasury shares Share-based payment reserve Accumulated losses Revaluation reserve TOTAL EQUITY TOTAL LIABILITIES AND EQUITY 7 8 9 10 11 12 12 13 13 13 598 5,594 - 4 - 761 379 86 2 425 257,293 219,249 64 14 1,300 14 263,567 222,216 - 2,460 - 168 81 585 23,243 3,754 1 1,187 222 763 3,294 29,170 230 26,998 (3,164) 1,039 (10,901) 246,071 260,273 263,567 188 8,623 (3,670) 1,232 (20,861) 207,534 193,046 222,216 Approved for issue and signed on behalf of the Board of Directors on 9 April 2020 . Constantinos Economides Mary Trimithiotou Director Director 14 14 14 9 15 16 Interest income calculated using the effective interest rate meth- od Other similar income Interest expense calculated using the effective interest rate method Net interest expense Credit loss allowance for debt financial instruments Net interest expense after сredit loss allowance Dividend income Net (losses)/gains from derivatives revaluation Net gains/(losses) from foreign exchange translation Net gains from operations with foreign currencies Net gains/(losses) from debt instruments at FVTPL Net gains from disposals of debt securities at FVOCI Administrative and other operating expenses Other operating income Profit before tax Income tax expense Profit/(loss) for the year Other comprehensive income: Items that may be reclassified subsequently to profit or loss Debt securities at FVOCI: - Net gains arising during the year, net of tax - Net gains reclassified to profit or loss upon disposal, net of tax Items that will not be reclassified subsequently to profit or loss: Net gains arising during the year on investments in equity securi- ties at fair value through other comprehensive income Income tax credit/(charge) recorded directly in other comprehen- sive income Other comprehensive income for the year, net of tax Total comprehensive income for the year 272 28 (732) (432) - (432) 17,158 (678) 477 111 31 - (251) 284 16,700 (884) 15,816 - - 107 84 (1,404) (1,213) (19) (1,232) 1,351 538 (560) 195 (112) 90 (347) 140 63 (86) (23) 78 (79) 37,362 10,148 1,019 38,381 54,197 (622) 9,525 9,502 The notes № 1-24 are an integral part of these Separate Financial Statements . The notes № 1-24 are an integral part of these Separate Financial Statements . F-151 F-152 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Separate Statement of Changes in Equity In millions of RR - i m e r p e r a h S m u n o i t a u l a v e R e v r e s e r d e s a b - e r a h S t n e m y a p d e t a l u m u c c A / ) s e s s o l ( e m o c n i e t o N l a t i p a c e r a h S y r u s a e r T s e r a h s l a t o T Separate Statement of Cash Flows In millions of RR Cash flows used in operating activities Interest income calculated using the effective interest rate method received Other similar income received Balance at 31 December 2017 188 8,623 197,717 1,286 (8,593) (1,587) 197,634 Interest expense calculated using the effective interest rate method paid - - - - 1 (21) - - (1) 21 - - - - Administrative and other operating expenses paid Income tax paid Cash (paid)/received from operations with financial derivatives Cash received from trading in foreign currencies 188 8,623 197,697 1,286 (8,573) (1,587) 197,634 Other operating income received Effect of initial application of IFRS 9 – ECL remeasurement, net of tax Effect of initial application of IFRS 9 – other Restated balance at 1 January 2018 Loss for the year Other comprehensive income: Investments in equity securities at FVOCI Investments in debt securities at FVOCI Income tax charge recorded directly in other comprehensive income Total comprehensive income for the year GDRs buy-back Share-based payment reserve Dividends - - - - - - - 13 13 17 - - - 10,148 (1) (622) 9,525 - - - - - - 312 (54) - - - - - - (23) - - - (23) - - - - - - - (23) 10,148 (1) (622) 9,502 (2,455) (2,455) 372 630 Note 2019 2018 248 - (741) (456) (26) (651) 111 300 78 71 (998) (532) (20) 342 195 - (5,215) 410 (373) (6,393) 199 466 (144) (343) 17,583 - (21,317) (12,545) 21,312 (416) 206 - 12,667 (606) - (2) Cash flows used in operating activities before changes in operating assets and liabilities (1,215) (864) Changes in operating assets and liabilities Net (increase)/decrease in loans and deposit placement with related parties Net decrease in investments in debt securities at FVTPL Net decrease in other non-financial liabilities Net cash used in operating activities Cash flows from/(used in) investing activities Dividend received from subsideries Acquisition of debt securities at FVOCI Proceeds from sale and redemption of debt securities at FVOCI Acquisition of investments in equity securities at FVOCI Proceeds from investments in equity securities at FVOCI - - (12,265) - (12,265) Acquisition of tangible fixed assets Balance at 31 December 2018 188 8,623 207,534 1,232 (20,861) (3,670) 193,046 Net cash generated from/(used in) investing activities 17,368 (486) Profit for the year Other comprehensive income: Investments in equity securities at FVOCI Income tax credit recorded direct- ly in other comprehensive income Total comprehensive income for the year Shares issued Secondary public offering costs Share-based payment reserve Dividends - - - - - - - - 13 13 13 17 42 18,874 - - - (499) - - - - 15,816 - 15,816 Cash flows (used in)/from financing activities 37,362 1,019 38,381 - - - - - - - 156 (193) - - - 37,362 - 1,019 15,816 - 54,197 - - - - - 18,916 (499) 506 469 - - (5,856) - (5,856) Proceeds from secondary public offering Secondary public offering costs paid Proceeds from debt securities in issue Repayment of debt securities in issue Loans repaid Loans received Dividends paid Repayment of principal of lease liabilities GDR buy back Net cash (used in)/generated from financing activities Effect of exchange rate changes on cash and cash equivalents Balance at 31 December 2019 230 26,998 246,071 1,039 (10,901) (3,164) 260,273 Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year The notes № 1-24 are an integral part of these Separate Financial Statements . The notes № 1-24 are an integral part of these Separate Financial Statements . 13 13 18 18 18 10 17 13 7 7 18,916 (499) 2,527 - - 3,622 (3,418) (3,204) (23,092) - - 14,955 (5,601) (11,946) (3) - - (2,455) (11,170) 32 (163) 761 598 972 233 376 385 761 F-153 F-154 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Separate Financial Statements 1 Introduction These separate financial statements have been prepared in accordance with International Financial Reporting Stand- ards (“IFRS”) as adopted by the European Union (“EU”) for the year ended 31 December 2019 for TCS Group Holding PLC (the “Company”), and in accordance with the requirements of the Cyprus Companies Law, Cap .113 . The Company has also prepared and issued consolidated financial statements for the year ended 31 December 2019 . The Company was incorporated, and is domiciled, in Cyprus in accordance with the provisions of the Companies Law, Cap .113 . The Board of Directors of the Company at the date of authorisation of these of these separate financial statements consists of: Constantinos Economides, Alexios Ioannides, Mary Trimithiotou, Jacques Der Megreditchian and Martin Robert Cocker . The Company Secretary is Caelion Secretarial Limited, 25 Spyrou Araouzou, 25 Berengaria, 5th floor, Limassol, Cyprus . At 31 December 2019 and 2018 the share capital of the Company is comprised of “class A” shares and “class B” shares . A “class A” share is an ordinary share with a nominal value of USD 0 .04 per share and carrying one vote . A “class B” share is an ordinary share with a nominal value of USD 0 .04 per share and carrying 10 votes . As at 31 December 2019 the number of issued “class A” shares is 119,291,268 and issued “class B” shares is 80,014,224 (31 December 2018: the number of issued “class A” shares is 96,239,291 and issued “class B” shares is 86,399,534) . Refer to Note 13 for the information about main changes during the year in the number of “class A” and “class B” shares . On 25 October 2013 the Company completed an initial public offering of its “Class A” ordinary shares in the form of global depository receipts (GDRs) listed on the London Stock Exchange plc . On 2 July 2019 the Company completed a secondary public offering (SPO) of its “class A” shares in the form of GDRs . Refer to Note 13 for the information about SPO . On 28 Octo- ber 2019 the Company’s GDRs started trading also on the Moscow Exchange . As at 31 December 2019 and 2018 the entities and the individuals holding either Class A or Class B shares of the Company were: Class of shares 31 December 2019 31 December 2018 Country of Incorporation As at 31 December 2019 and 2018 the ultimate controlling party of the Company is Mr . Oleg Tinkov . Mr . Oleg Tinkov controls approximately 87 .03% of the aggregated voting rights attaching to the Class A and B shares as at 31 December 2019 (31 December 2018: 89 .98%) excluding voting rights attaching to TCS Group Holding PLC GDRs he holds, if any . The Company owns 100% of the shares and has 100% of the voting rights (directly or indirectly) of the following subsidiar- ies at 31 December 2019 and 2018: JSC “Tinkoff Bank” (“the Bank”), LLC "Microfinance company “Т-Finans”, LLC TCS, LLC “Phoenix”, Tinkoff Software DC, LLC “Тinkoff Mobile”, Goward Group Limited (since February 2018 Goward Group Ltd was in liq- uidation process, and on 16 April 2019 the company was liquidated), LLC “Fintech DC”, LLC “Tinkoff Capital” and ANO “Tinkoff Education” . As at 31 December 2019 the Company owns 80 .08% and the Bank owns 9 .92% of the shares of the JSC “Tinkoff Insurance” (“the Insurance Company”) . In June 2019 the Insurance company repurchased 10% of its shares . The Company and its subsidiaries together referred to as the “Group” . At 31 December 2019, the Company owns directly 55% of the shares of LLC “CloudPayments” . Additional 40% of the shares of LLC “CloudPayments” is held indirectly through the shares owned by the Bank (31 December 2018: 55% to the Company) . Principal activity. The Company’s principal business activities are the holding of investments in Russian subsidiary companies and starting from December 2017 offering Cyprus based home call center services to customers and potential customers outside of Russia . The Bank operates under general banking license No . 2673 issued by the Central Bank of the Russian Feder- ation (“CBRF”) since 8 December 2006 . The Insurance Company operates under an insurance license issued by the CBRF . The Bank participates in the state deposit insurance scheme, which was introduced by Federal Law No . 177-FZ “Deposits insurance in banks of the Russian Federation” dated 23 December 2003 . The State Deposit Insurance Agency guarantees re- payment of insurance compensation up to RR 1 .4 million per individual, individual entrepreneur and small enterprise deposits in case of the withdrawal of a licence of a bank or a CBRF-imposed moratorium on payments . JSC “Tinkoff Insurance” (the “Insurance Company”) provides insurance services such as accident, property, travellers, financial risks and auto insurance . The subsidiary LLC “Microfinance company “Т-Finans” provides micro-finance services to clients . The subsidiary LLC “TCS” provides printing and distribution services to the Bank . United Kingdom The subsidiary Goward Group Limited is an investment holding company which managed part of the Group’s assets . Since February 2018 Goward Group Ltd was in liquidation process, and on 16 April 2019 the company was liquidated . Guaranty Nominees Limited (JP Morgan Chase Bank NA) Altoville Holdings Limited Nemorenti Limited Ioanna Georgiou Panagiota Charalambous Maria Vyra Marios Panayides Chloi Panagiotou Leonora Chagianni Total Class A Class B Class B Class A Class A Class A Class A Class A Class A 59 .85% 18 .47% 21 .68% 0 .00% 0 .00% 0 .00% 0 .00% 0 .00% 0 .00% 52 .70% 23 .65% 23 .65% 0 .00% 0 .00% 0 .00% 0 .00% 0 .00% 0 .00% 100.00% 100.00% Cyprus Cyprus Cyprus Cyprus Cyprus Cyprus Cyprus Cyprus Guaranty Nominees Limited is a company holding class A shares of the Company for which global depositary receipts are issued under a deposit agreement made between the Company and JP Morgan Chase Bank NA signed in October 2013 . As at 31 December 2019 and 2018 the beneficial owner of Altoville Holdings Limited and Nemorenti Limited is Russian entrepreneur Mr . Oleg Tinkov . The six individuals listed above each hold one share . The individuals hold them as nominees of Altoville Holdings Limited . The subsidiary LLC “Tinkoff Mobile” is a mobile virtual network operator set up in 2017 to provide mobile services . The subsidiary LLC “CloudPayments” is a developer of online payment solutions whose core business is online merchant acquiring in Russia . The subsidiary LLC “Phoenix” is a debt collection agency . The subsidiary Tinkoff Software DC and LLC “Fintech DC” provides software development services to the Group . LLC “Tinkoff Capital” is an asset management company established in June 2019 to manage investment funds, mutual funds and non-state pension funds . ANO “Tinkoff Education” is a non-commercial organization set up by the Bank as the sole founder . EBT is a special purpose trust which has been specifically created for the long-term incentive programme for Management of the Group (MLTIP) . Registered address and place of business. The Company’s registered address is 25 Spyrou Araouzou, 25 Berengaria, 5th floor, Limassol, Cyprus . Presentation currency. These separate financial statements are presented in millions of Russian Rubles (RR) . F-155 F-156 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019 31 DECEMBER 2019 Notes to the Separate Financial Statements (Continued) 2 Operating Environment of the Company Russian Federation. The Company’s main subsidiaries all operate within the Russian Federation, which displays certain char- acteristics of an emerging market . Its economy is particularly sensitive to the price of oil and gas on the world market . The legal, tax and regulatory frameworks continue to develop and are subject to frequent changes and varying interpretations (Note 21) . In recent years, the Russian economy has been negatively impacted by ongoing political tension in the region and international sanctions against certain Russian companies and individuals . In March 2020, oil prices dropped significantly, which resulted in the immediate weakening of Russian Ruble against major currencies at the date of approval of these separate financial statements as compared to the end of 2019 . With respect to Rouble interest rates, CBRF “key rate” amounted to 6 .25% per annum as at 31 December 2019 (31 December 2018: 7 .75%) . The Group actively monitors the situation in the Russian banking sector and the activity of CBRF in response to current and newly developed requirements, or any sanctions against the participants who breach them . In particular in 2019 CBRF introduced certain macroprudential adjustments (for example borrowers’ debt burden limit) to manage macroeconomic risks related to primarily unsecured lending . Management of the Group believes it is highly important to participate in the discus- sion of legislation development in the banking sphere and supports the intention of the CBRF to make the finance market more transparent and disciplined . In addition, late in 2019, news first emerged from China about the COVID-19 (Coronavirus) . At the end of 2019 a limited number of cases of an unknown virus had been reported to the World Health Organisation . In the first few months of 2020 the virus had spread globally resulting in an announcement of pandemic status by the World Health Organization in March 2020 . Responses put in place by many countries to contain the spread of COVID-19 are resulting in significant operational disruption for many companies and have had a significant impact on global financial markets . As the situation is rapidly evolving it may have a significant effect on the business of many companies across a wide range of sectors, including, but not limited to such impacts as disruption of business operations as a result of interruption of production or closure of facilities, supply chain disruptions, quarantines of personnel, reduced demand and difficulties in raising financing . In addition, the Company’s subsid- iaries may face the increasingly broad effects of COVID-19 as a result of its negative impact on the global economy and major financial markets . The significance of the impact of COVID-19 on the subsidiaries’ business largely depends on the duration and the incidence of the pandemic effects on the world and Russian economy . Management considers this outbreak to be a non-adjusting post balance sheet event . While this is still an evolving situation at the time of issuing these separate financial statements, to date there has been no discernible impact on the Group's business, however the future effects cannot be predicted . As the situation is rapidly evolving, we do not consider it is practicable at present to determine a quantitative estimate of the potential impact of this outbreak on the Group . However, the Company has developed a stress scenario of the possible impact on the current operating environment on the Company’s cash flows and liquidity position . The scenario demonstrated the Company’s ability to continue as a going concern . Also several pieces of legislation have been adopted, with two particularly relevant provisions affecting the Company and its subsidiaries: • Payment holidays for consumer loans of borrowers that have lost more than 30% of their income or have been diagnosed with COVID-19 . Until the end of September 2020 troubled borrowers will be able to request a payment holiday of up to 6 months when supported by certain official documentation . During this period, interest can be accrued in an amount equat- ing to 2/3 of the average market interest rate (PSK) for the product . At the end of the payment holiday, the original loan balance prior to the payment holidays returns to its contractual interest rate, while the additional interest accrued during the payment holiday is converted into a 720-day instalment loan, with instalments added to the regular payments of the original loan . • Caps on interchange and acquiring fees for online purchases of certain goods: interchange and acquiring fees for online purchases of certain goods were temporarily reduced until the end of September 2020 . The overall impact on the Company and its subsidiaries will therefore depend on the number of borrowers that ask for payment holidays . While we are not yet in a position to predict this number, it is likely that the Group will be affected by a partial and temporary loss of interest income on rescheduled exposures, and an increase in risk costs as these loans would be reclassified to Stage 2 or 3 under IFRS . The effect of this negative situation will be reflected in impairment losses and expected credit loss- es in 2020, as a result of updating the expected credit loss model for statistical data and macroeconomic forecasts . Using flexible business structure the Group swiftly moved some of its employees from acquisition to collection functions . The Group has been able to offer some of its cloud call center services to government institutions in support of dealing with in- creased enquiries coming from the Coronavirus outbreak . The Group reiterates its ability to withstand shocks and its positive long-term outlook . The Group has a highly liquid, FX-hedged, and well-capitalized balance sheet . The Group has the ability to delivery services digitally, and it intends to use this opportunity to heavily promote its mobile lifestyle app, current accounts, and brokerage business . Therefore, while management recognizes the near-term challenges, it is confident that the Group’s business model and response function will lead to come out of the current volatility . Management will continue to monitor the potential impact and will take steps to mitigate any effects where required . 3 Significant Accounting Policies Basis of preparation. These separate financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (EU) and the requirements of the Cyprus Companies Law Cap .113 . The Company has prepared these separate financial statements for compliance with the requirements of the Cyprus lncome Тах Law and the Disclosure Rule as issued by the Financial Security Authority of the United Kingdom . The Соmраnу has also prepared consolidated financial statements in accordance with IFRS as adopted by the EU and the requirements of the Cyprus Companies Law Cap . 113 for the Company and its subsidiaries (“the Group”) . The consolidated financial statements саn bе obtained from 25 Spyrou Araouzou, 25 Berengaria, 5th floor, Limassol, Cyprus and the website of the Company www .tinkoff .ru . The separate financial statements have been prepared under the historical cost convention, as modified by the initial recogni- tion of financial instruments based on fair value, and by revaluation of financial instruments categorised at fair value through profit or loss (“FVTPL”) and at fair value through other comprehensive income (“FVOCI”) . The principal accounting policies ap- plied in the preparation of these consolidated financial statements are set out below . Apart from the accounting policy changes resulting from the adoption of IFRS 16 effective from 1 January 2019, these policies have been consistently applied to all the periods presented, unless otherwise stated . Refer to Note 5 . Management prepared these separate financial statements on a going concern basis . Financial instruments – key measurement terms. Depending on their classification financial instruments are carried at fair value or amortised cost as described below . Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date . The best evidence of fair value is the quoted price in an active market . An active market is one in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis . Fair value of financial instruments traded in an active market is measured as the product of the quoted price for the individual asset or liability and the quantity held by the entity . This is the case even if a market’s nor- mal daily trading volume is not sufficient to absorb the quantity held and placing orders to sell the position in a single transac- tion might affect the quoted price . The price within the bid-ask spread which management considers to be the most representative of fair value for quoted finan- cial assets and liabilities is the last bid price of the business day . A portfolio of financial derivatives or other financial assets and liabilities that are not traded in an active market is measured at the fair value of a group of financial assets and financial liabilities on the basis of the price that would be received to sell a net long position (an asset) for a particular risk exposure or paid to transfer a net short position (a liability) for a particular risk exposure in an orderly transaction between market partici- pants at the measurement date . F-157 F-158 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Separate Financial Statements (Continued) 3 Significant Accounting Policies (Continued) This is applicable for assets carried at fair value on a recurring basis if the Company: (a) manages the group of financial assets and financial liabilities on the basis of the entity’s net exposure to a particular market risk (or risks) or to the credit risk of a particular counterparty in accordance with the entity’s documented risk management or investment strategy; (b) it provides information on that basis about the group of assets and liabilities to the entity’s key management personnel; and (c) the mar- ket risks, including duration of the entity’s exposure to a particular market risk (or risks) arising from the financial assets and financial liabilities is substantially the same . Valuation techniques such as discounted cash flow models or models based on recent arm’s length transactions or considera- tion of financial data of the investees, are used to measure fair value of certain financial instruments for which external market pricing information is not available . Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) level one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities, (ii) level two measurements are valuations techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and (iii) level three measurements are valuations not based on solely observable market data (that is, the meas- urement requires significant unobservable inputs) . Transfers between levels of the fair value hierarchy are deemed to have occurred at the end of the reporting period . Refer to Note 21 . Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instru- ment . An incremental cost is one that would not have been incurred if the transaction had not taken place . Transaction costs include fees and commissions paid to agents (including employees acting as selling agents), advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties . Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs . Amortised cost (“AC”) is the amount at which the financial instrument was recognised at initial recognition less any principal repayments, plus accrued interest, and for financial assets less any allowance for expected credit losses . Accrued interest includes amortisation of transaction costs deferred at initial recognition and of any premium or discount to maturity amount using the effective interest method . Accrued interest income and accrued interest expense, including both accrued coupon and amortised discount or premium (including fees deferred at origination, if any), are not presented separately and are included in the carrying values of related items in the separate statement of financial position . The effective interest method is a method of allocating interest income or interest expense over the relevant period, so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount . The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future credit losses) through the expected life of the financial instrument or a shorter period, if appropriate, to the gross carrying amount of a financial asset or to the amortised cost of a financial liability . The calculation does not consider expected credit losses and includes transaction costs, premiums or discounts and fees and points paid or secured that are integral to the effective interest rate such as origination fees . The effective interest rate discounts cash flows of variable interest instruments to the next interest repricing date, except for the premium or discount, which reflects the credit spread over the floating rate specified in the instrument, or other variables that are not reset to market rates . Such premiums or discounts are amortised over the whole expected life of the instrument . The present value calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate . For assets that are purchased or originated credit impaired (“POCI”) at initial recognition, the effective interest rate is adjusted for credit risk, i .e . it is calculated based on the expected cash flows on initial recognition instead of contractual payments . Financial instruments – initial recognition. Financial instruments at FVTPL are initially recorded at fair value . All other finan- cial instruments are initially recorded at fair value adjusted for transaction costs that are incremental and directly attributable to the acquisition or the issue of the financial asset or financial liability . Fair value at initial recognition is best evidenced by the transaction price . A gain or loss on initial recognition is only recorded if there is a difference between fair value and transac- tion price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets . After the initial recognition, an ECL allowance is recog- nised for financial assets measured at AC and investments in debt instruments measured at FVOCI, resulting in an immediate accounting loss . All purchases and sales of financial assets that require delivery within the time frame established by regulation or market convention (“regular way” purchases and sales) are recorded at trade date, which is the date on which the Company commits to deliver a financial asset . All other purchases are recognised when the entity becomes a party to the contractual provisions of the instrument . The Company uses discounted cash flow valuation techniques to determine the fair value of currency swaps, foreign exchange forwards that are not traded in an active market . Differences may arise between the fair value at initial recognition, which is considered to be the transaction price, and the amount determined at initial recognition using a valuation technique . The differences are immediately recognised in profit or loss if the valuation uses only level 1 or level 2 inputs . Financial assets – classification and subsequent measurement – measurement categories. The Company classifies financial assets in the following measurement categories: FVTPL, FVOCI and AC . The classification and subsequent measurement of debt financial assets depends on: • the Company’s business model for managing the related assets portfolio; and • the cash flow characteristics of the asset . Financial assets – classification and subsequent measurement – business model. The business model reflects how the Com- pany manages the assets in order to generate cash flows – whether the Company’s objective is: • solely to collect the contractual cash flows from the assets (“hold to collect contractual cash flows”); or • to collect both the contractual cash flows and the cash flows arising from the sale of assets (“hold to collect contractual cash flows and sell”); • if neither of i) and ii) is applicable, the financial assets are classified as part of “other” business model and measured at FVTPL . Business model is determined for a group of assets (on a portfolio level) based on all relevant evidence about the activities that the Company undertakes to achieve the objective set out for the portfolio available at the date of the assessment . Factors considered by the Company in determining the business model include the purpose and composition of a portfolio, past experi- ence on how the cash flows for the respective assets were collected, how risks are assessed and managed, how the assets’ performance is assessed and how managers are compensated . Based on the analysis performed the Company included the following financial instruments in the business model “hold to collect contractual cash flows” since the Company manages these financial instruments solely to collect contractual cash flows: cash and cash equivalents, loans and deposit placements with related parties and other financial assets . The Company includ- ed debt securities at FVOCI in the business model “hold to collect contractual cash flows and sell” since the Company manages these financial instruments to collect both the contractual cash flows and the cash flows arising from the sale of assets (for 2018 only) . The Company included debt securities measured at FVTPL and financial derivatives in the business model “other” . Financial assets – classification and subsequent measurement – cash flow characteristics. Where the business model is to hold assets to collect contractual cash flows or to hold contractual cash flows and sell, the Company assesses whether the cash flows represent solely payments of principal and interest (the SPPI test) . Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are consistent with the SPPI feature . F-159 F-160 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Separate Financial Statements (Continued) 3 Significant Accounting Policies (Continued) In making this assessment, the Company considers whether the contractual cash flows are consistent with a basic lending arrangement, i .e . interest includes only consideration for credit risk, time value of money, other basic lending risks and profit margin . Where the contractual terms introduce exposure to risk or volatility that is inconsistent with a basic lending arrangement, the financial asset is classified and measured at FVTPL . The SPPI assessment is performed on initial recognition of an asset and it is not subsequently reassessed . However, if the contractual terms of the asset are modified, the Company considers if the contractual cash flows continue to be consistent with a basic lending arrangement in assessing whether the modification is substantial . See below for “Financial assets – modification” . Financial assets – reclassification. Financial instruments are reclassified only when the business model for managing the portfolio as a whole changes . The reclassification has a prospective effect and takes place from the beginning of the first re- porting period that follows after the change in the business model . The Company did not change its business model during the current and comparative period and did not make any reclassifications . Financial assets – impairment – credit loss allowance for ECL. The Company assesses on a forward-looking basis the ECL for debt instruments (including loans) measured at AC and FVOCI and for the exposure arising from loan commitments and finan- cial guarantee contracts . The Company measures ECL and recognises credit loss allowance at each reporting date . The measurement of ECL reflects: 1) an unbiased and probability weighted amount that is determined by evaluating a range of possible outcomes; 2) the time value of money; and 3) all reasonable and supportable information that is available without undue cost and effort at the end of each reporting period about past events, current conditions and forecasts of future conditions . Debt instruments measured at AC are presented in the separate statement of financial position net of the allowance for ECL . For financial guarantees a separate provision for ECL is recognised as a financial liability in the separate statement of financial position . For debt instruments at FVOCI, changes in amortised cost, net of allowance for ECL, are recognised in profit or loss and other changes in carrying value are recognised in OCI as gains less losses on debt instruments at FVOCI . The Company applies a “three stage” model for impairment in accordance with IFRS 9, based on changes in credit quality since initial recognition: 1) A financial instrument that is not credit-impaired on initial recognition is classified in Stage 1 . Financial assets in Stage 1 have their ECL measured at an amount equal to the portion of lifetime ECL that results from default events possible within the next 12 months or until contractual maturity, if shorter (“12 months ECL”) . 2) If the Company identifies a significant increase in credit risk (“SICR”) since initial recognition, the asset is transferred to Stage 2 and its ECL is measured based on ECL on a lifetime basis, that is, up until contractual maturity but considering expected prepayments, if any (“lifetime ECL”) . Refer to Note 19 for a description of how the Company determines when a SICR has occurred . 3) If the Company determines that a financial asset is credit-impaired, the asset is transferred to Stage 3 and its ECL is meas- ured as a lifetime ECL . Refer to Note 19 for a description of how the Company defines credit-impaired assets and default . Note 19 provides information about inputs, assumptions and estimation techniques used in measuring ECL . Financial assets – write-off. Financial assets are written-off, in whole or in part, when the Company exhausted all practical recovery efforts and has concluded that there is no reasonable expectation of recovery . The write-off represents a derecogni- tion event . The Company may write-off financial assets that are still subject to enforcement activity when the Company seeks to recover amounts that are contractually due, however, there is no reasonable expectation of recovery . Financial assets – derecognition. The Company derecognises financial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expired or (b) the Company has transferred the rights to the cash flows from the finan- cial assets or entered into a qualifying pass-through arrangement while (i) also transferring substantially all risks and rewards of ownership of the assets or (ii) neither transferring nor retaining substantially all risks and rewards of ownership, but not retaining control . Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose restrictions on the sale . Financial assets – modification. The Company sometimes renegotiates or otherwise modifies the contractual terms of the financial assets . The Company assesses whether the modification of contractual cash flows is substantial considering, among other, the following factors: any new contractual terms that substantially affect the risk profile of the asset, significant change in interest rate, change in the currency denomination, new collateral or credit enhancement that significantly affects the credit risk associated with the asset, or a significant extension of a loan when the borrower is not in financial difficulties . If the modified terms are substantially different, the rights to cash flows from the original asset expire and the Company derecognises the original financial asset and recognises a new asset at its fair value . The date of renegotiation is considered to be the date of initial recognition for subsequent impairment calculation purposes, including determining whether a SICR has occurred . The Company also assesses whether the new loan or debt instrument meets the SPPI criterion . Any difference between the carrying amount of the original asset derecognised and fair value of the new substantially modified asset is recognised in profit or loss, unless the substance of the difference is attributed to a capital transaction with owners . In a situation where the renegotiation was driven by financial difficulties of the counterparty and inability to make the originally agreed payments, the Company compares the original and revised expected cash flows to assets whether the risks and re- wards of the asset are substantially different as a result of the contractual modification . If the risks and rewards do not change, the modified asset is not substantially different from the original asset and the modification does not result in derecognition . The Company recalculates the gross carrying amount by discounting the modified contractual cash flows by the original effec- tive interest rate, and recognises a modification gain or loss in profit or loss . Financial liabilities – measurement categories. Financial liabilities are classified as subsequently measured at AC, except for financial liabilities at FVTPL: this classification is applied to derivatives, financial liabilities held for trading (e .g . short positions in securities) . Financial liabilities – derecognition. Financial liabilities are derecognised when they are extinguished (i .e . when the obligation specified in the contract is discharged, cancelled or expires) . An exchange between the Company and its original lenders of debt instruments with substantially different terms, as well as substantial modifications of the terms and conditions of existing financial liabilities, are accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability . The terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10% different from the dis- counted present value of the remaining cash flows of the original financial liability . In addition, other qualitative factors, such as the currency that the instrument is denominated in, changes in the type of inter- est rate, new conversion features attached to the instrument and change in loan covenants are also considered . If an exchange of debt instruments or modification of terms is accounted for as an extinguishment, any costs or fees incurred are recognised as part of the gain or loss on the extinguishment . If the exchange or modification is not accounted for as an extinguishment, any costs or fees incurred adjust the carrying amount of the liability and are amortised over the remaining term of the modi- fied liability . Modifications of liabilities that do not result in extinguishment are accounted for as a change in estimate using a cumulative catch up method, with any gain or loss recognised in profit or loss, unless the economic substance of the difference in carrying values is attributed to a capital transaction with owners . F-161 F-162 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Separate Financial Statements (Continued) 3 Significant Accounting Policies (Continued) Cash and cash equivalents. Cash and cash equivalents include deposits held at call with banks, and other short-term highly liquid investments with original maturities of three months or less . Cash and cash equivalents are carried at AC because: (i) they are held for collection of contractual cash flows and those cash flows represent SPPI, and (ii) they are not designated at FVTPL . Loans and deposit placements with related parties. Loans and deposit placement with related parties are recorded when the Company advances money to purchase or originate an unquoted non-derivative receivable from related party due on fixed or determinable dates and has no intention of trading the receivable . Loans and deposit placement with related parties are classified within held to collect business model, pass SPPI and are carried at amortised cost using effective interest rate . Refer to Note 8 for details of ECL measurement for loans and deposit placements with related parties . Financial derivatives. Financial derivatives represented by foreign exchange swaps and forwards are carried at their fair value . Derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative . Changes in the fair value of financial derivatives are recorded within Net (losses)/gains from derivatives revaluation . The Company does not apply hedge accounting . Tangible fixed assets. Tangible fixed assets are stated at cost less accumulated depreciation and provision for impairment, where required . Costs of minor repairs and day-to-day maintenance are expensed when incurred . Costs of replacing major parts or compo- nents of premises and equipment items are capitalised, and the replaced part is retired . At the end of each reporting period management assesses whether there is any indication of impairment of tangible fixed assets . If any such indication exists, management estimates the recoverable amount, which is determined as the higher of an asset’s fair value less costs to sell and its value in use . The carrying amount is reduced to the recoverable amount and the im- pairment loss is recognised in profit or loss for the year . An impairment loss recognised for an asset in prior years is reversed if there has been a change in the estimates used to determine the asset’s value in use or fair value less costs to sell . Gains and losses on disposals determined by comparing proceeds with carrying amount are recognised in profit or loss for the year (within other operating income or expenses) . Depreciation. Depreciation of each item of tangible fixed assets is calculated using the straight-line method to allocate its cost to its residual value over its estimated useful life as follows: Equipment Useful lives in years 3 to 10 The residual value of an asset is an estimated amount that the Company would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset was already of the age and in the condition expected at the end of its useful life . The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period . Accounting for leases by the Company as a lessee from 1 January 2019. From 1 January 2019, leases, where the Compa- ny is the lessee, are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Company . Each lease payment is allocated between the liability and finance cost . The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period . The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis . Assets and liabilities arising from a lease are initially measured on a present value basis . Lease liabilities include the net pres- ent value of the following lease payments: • fixed payments (including in-substance fixed payments), less any lease incentives receivable under cancellable and non-can- cellable operating leases; • variable lease payments that are based on an index or a rate and that are initially measured using the index or rate as at the commencement date; • amounts expected to be payable by the lessee under residual value guarantees; • the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and • payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option . The lease term includes any non-cancellable and optional extension periods which have been assessed as reasonably certain to be exercised . The lease payments are discounted using the interest rate implicit in the lease . If that rate cannot be readily determined, the Company’s incremental borrowing rate is used, being the rate that the Company would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms, security and conditions . Right-of-use assets are measured at cost comprising the following: • the amount of the initial measurement of lease liability; • any lease payments made at or before the commencement date less any lease incentives received; • any initial direct costs; and • dismantling and restoration costs . As an exception to the above, the Company accounts for short-term leases and leases of low value assets by recognising the lease payments as an operating expense in profit or loss on a straight line basis . Short-term leases are leases with a lease term of 12 months or less, and the lease does not provide for the possibility of repurchase of the asset at the end of the contract . Low value assets are assets with a value of RR 300,000 or less at the date of conclusion of the contract . Right-of-use assets are included in tangible fixed assets, lease liabilities are included in other non-financial liabilities in the sep- arate statement of financial position . Depreciation of right-of-use assets are recognised in administrative and other operating expenses in the separate statement of profit or loss and other comprehensive income . Finance cost is recognised within other similar expense line of the separate statement of profit or loss and other comprehensive income . Repayment of principal of lease liabilities is disclosed within cash flows from financing activities of the separate statement of cash flows . Right-of-use asset are reviewed for impairment in accordance with the Company’s accounting policy for impairment of non-fi- nancial assets . Accounting for operating leases by the Company as a lessee prior to 1 January 2019. Where the Company is a lessee in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the lessor to the Company, the total lease payments are charged to profit or loss for the year (rental expense within administrative and other operating expenses) on a straight-line basis over the period of the lease . Leases embedded in other agreements are separated if (a) fulfilment of the arrangement is dependent on the use of a specific asset or assets and (b) the arrangement conveys a right to use the asset . When assets are leased out under an operating lease, the lease payments receivable are recognised as rental income on a straight-line basis over the lease term . Investments in debt securities. Based on the business model and the contractual cash flow characteristics, the Company classifies investments in debt securities as carried at AC, FVOCI or FVTPL . Debt securities are carried at AC if they are held for collection of contractual cash flows and where those cash flows represent SPPI, and if they are not voluntarily designated at FVTPL in order to significantly reduce an accounting mismatch . F-163 F-164 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Separate Financial Statements (Continued) 3 Significant Accounting Policies (Continued) Debt securities are carried at FVOCI if they are held for collection of contractual cash flows and for selling, where those cash flows represent SPPI, and if they are not designated at FVTPL . Interest income from these assets is calculated using the effec- tive interest method and recognised in profit or loss . An impairment allowance estimated using the expected credit loss model is recognised in profit or loss for the year . All other changes in the carrying value are recognised in OCI except for net results from operations with foreign currencies and interest income calculated using the effective interest rate method . When the debt security is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from OCI to profit or loss . Investments in debt securities are carried at FVTPL if they do not meet the criteria for AC or FVOCI . The Company may also irrevocably designate investments in debt securities at FVTPL on initial recognition if applying this option significantly reduces an accounting mismatch between financial assets and liabilities being recognised or measured on different accounting bases . Sale and repurchase agreements and lending of securities. Sale and repurchase agreements (“repo agreements”), which effectively provide a lender’s return to the counterparty, are treated as secured financing transactions . Securities sold under such sale and repurchase agreements are not derecognised . The securities are not reclassified in the separate statement of financial position unless the transferee has the right by contract or custom to sell or repledge the securities, in which case they are reclassified as repurchase receivables . The corresponding liability is presented within amounts loans received . Securities purchased under agreements to resell (“reverse repo agreements”), which effectively provide a lender’s return to the Company, are recorded as loans received . The difference between the sale and repurchase price, adjusted by interest and dividend income collected by the counterparty, is treated as interest income and accrued over the life of reverse repo agree- ments using the effective interest method . Securities lent to counterparties for a fixed fee are retained in the separate financial statements in their original category in the separate statement of financial position unless the counterparty has the right by contract or custom to sell or repledge the securities, in which case they are reclassified and presented separately . Securities borrowed for a fixed fee are not recorded in the separate financial statements, unless these are sold to third parties, in which case the purchase and sale are recorded in profit or loss for the year within gains less losses arising from trading securities . The obligation to return the securities is recorded at fair value in other borrowed funds . Based on classification of securities sold under the sale and repurchase agreements, the Company classifies repurchase re- ceivables into one of the following measurement categories: AC, FVOCI, FVTPL . Investments in equity securities. Financial assets that meet the definition of equity from the issuer’s perspective, i .e . instru- ments that do not contain a contractual obligation to pay cash and that evidence a residual interest in the issuer’s net assets, are considered as investments in equity securities by the Company . Investments in equity securities are measured at FVTPL, except where the Company elects at initial recognition to irrevocably designate an equity investment at FVOCI . The Company’s policy is to designate equity investments (including Invesments in subsidiaries) as FVOCI when those investments are held for strategic purposes other than solely to generate investment returns . When the FVOCI election is used, fair value gains and losses are recognised in OCI and are not subsequently reclassified to profit or loss, including on disposal . Impairment losses and their reversals, if any, are not measured separately from other changes in fair value . Dividends continue to be recognised in profit or loss when the Company’s right to receive payments is established except when they represent a recovery of an investment rather than a return on such investment . Investments in equity securities include investments in subsidiaries . Subsidiaries are all entities (including structured entities) over which the Company has control . The Company controls an entity when the Company is exposed to, or has rights to varia- ble returns from its involvement with the entity and has the ability to affect those returns through its power over the entity . In cases of acquisitions of subsidiaries from entities under common control or subsidiaries of the Company, the cost of acquisi- tion is determined to be the fair value of the investment acquired as opposed to the transaction price . Any differences between the transaction price and the fair value of the investment acquired reflect notional contributions/ distributions from entities under common control or subsidiaries and are recognised as such, i .e . directly in equity in cases of transactions with common control entities and as an additional contribution to or distribution from the subsidiary transferring the investment to the Company . Debt securities in issue. Debt securities are stated at amortised cost . If the Company purchases its own debt securities in issue, they are removed from the separate statement of financial position and the difference between the carrying amount of the liability and the consideration paid is included in a separate line of the separate statement of profit or loss and other comprehensive income . Loans received. Loans received are non-derivative financial liabilities to corporate entities and are carried at amortised cost using effective interest rate . In case a loan is received at a rate below market the corresponding deferred income on recog- nition of the loan at a rate below market is included in loans received balance and is amortised over the lifetime of the loan received on the straight-line basis . Other liabilities. Other liabilities are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers . Other liabilities are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method . Income taxes. Income taxes have been provided for in the separate financial statements in accordance with Cyprus legislation enacted or substantively enacted as of the end of the reporting period . The income tax (charge)/credit comprises current tax and deferred tax and is recognised in profit or loss for the year except if it is recognised in other comprehensive income or directly in equity because it relates to transactions that are also recognised, in the same or a different period, in other compre- hensive income or directly in equity . Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect of taxable profits or losses for the current and prior periods . Taxes other than on income are recorded within administrative and other operating expenses . Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes . In accord- ance with the initial recognition exemption, deferred taxes are not recorded for temporary differences on initial recognition of an asset or a liability in a transaction other than a business combination if the transaction, when initially recorded, affects neither accounting nor taxable profit . Deferred tax balances are measured at tax rates enacted or substantively enacted at the end of the reporting period which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilised . Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised . Deferred income tax is not recognised on post-acquisition retained earnings and other post acquisition movements in reserves of subsidiaries where the Company controls the subsidiary’s dividend policy, and it is probable that the difference will not reverse through dividends or otherwise in the foreseeable future . Provision for deferred tax on the undistributed profits of the Company’s subsidiaries is made when the dividend payment is probable to be made out of economic resources of the subsidiaries at the balance sheet date and is recognised in other comprehensive income . Withholding taxes incurred on actual dividend distributions by subsidiaries are recognised in profit or loss once the right of dividend income is established . Uncertain tax positions. The Company’s uncertain tax positions are assessed by management at the end of each reporting period . Liabilities are recorded for income tax positions that are determined by management as more likely than not to result in additional taxes being levied if the positions were to be challenged by the tax authorities . The assessment is based on the interpretation of tax laws that have been enacted or substantively enacted at the end of reporting period and any known court or other rulings on such issues . Liabilities for penalties, interest and taxes other than on income are recognised based on man- agement’s best estimate of the expenditure required to settle the obligations at the end of the reporting period . F-165 F-166 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Separate Financial Statements (Continued) 3 Significant Accounting Policies (Continued) Provisions for liabilities and charges. Provisions for liabilities and charges are non-financial liabilities of uncertain timing or amount . They are accrued when the Company has a present legal or constructive obligation as a result of past events, it is prob- able that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made . Levies and charges, such as taxes other than income tax or regulatory fees based on information related to a period before the obligation to pay arises, are recognised as liabilities when the obligating event that gives rise to pay a levy occurs, as identified by the legislation that triggers the obligation to pay the levy . If a levy is paid before the obligating event, it is recognised as a prepayment . Share capital. Ordinary shares are classified as equity . Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds and debited against share premium . Share premium. Share premium is the difference between the fair value of the consideration receivable for the issue of shares and the nominal value of the shares . The share premium account can only be resorted to for limited purposes, which do not in- clude the distribution of dividends, and is otherwise subject to the provisions of the Cyprus Companies Law on reduction of share capital . Treasury shares. Where the Company purchases the Company’s equity instruments, the consideration paid, including any directly attributable incremental external costs, net of income taxes, is deducted from equity attributable to the owners of the Company until the equity instruments are reissued, disposed of or cancelled . Where such shares are subsequently disposed of or reissued, any consideration received is included in equity . The value of GDRs transferred out of treasury shares for the purposes of the long-term incentive programme for management of the Group are determined based on the weighted average cost . The Company's equity instruments acquired by employee share trust entity are treated as treasury shares when the Company retains the majority of the risks and rewards relating to the funding arrangement for the trust entity . Share-based payments. The Company grants equity settled share based payments to employees of its subsidiary . No share- based payment charge is recognised as no employees are providing services to the Company . The Company records a debit to the investment in the subsidiaries as a capital contribution from the parent to the subsidiary and a credit to share-based payment reserve within equity . When the rewards granted under share-based payment programs vest the Company reclassifies accumulat- ed share based payment reserve to revaluation reserve . Dividends. Dividends are recorded in equity in the period in which they are declared . Any dividends declared after the end of the reporting period and before the separate financial statements are authorised for issue, are disclosed in the Note “Events after the End of the Reporting Period” . The separate financial statements of the Company prepared in accordance with IFRS as adopted by the EU and in accordance with Cyprus Companies Law is the basis of available reserves for distribution . Management considers the Revaluation Reserve to be a distributable reserve . Dividend distribution to the Company's shareholders is recognised as a liability in the Company's separate financial statements in the year in which the dividends are appropriately authorised and are no longer at the discretion of the Company . More specifically, interim dividends are recognised as a liability in the period in which these are authorised by the Board of Directors and in the case of final dividends, these are recognised in the period in which these are approved by the Company's shareholders . Interest income and expense recognition. Interest income and expense are recorded for all debt instruments, other than those at FVTPL, on an accrual basis using the effective interest method . This method defers, as part of interest income or expense, all fees paid or received between the parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts . Fees integral to the effective interest rate include origination fees received or paid by the entity relating to the creation or acquisi- tion of a financial asset or issuance of a financial liability . Commitment fees received by the Company to originate loans at market interest rates are integral to the effective interest rate if it is probable that the Company will enter into a specific lending arrange- ment and does not expect to sell the resulting loan shortly after origination . The Company does not designate loan commitments as financial liabilities at FVTPL . For financial assets that are originated or purchased credit-impaired, the effective interest rate is the rate that discounts the expected cash flows (including the initial expected credit losses) to the fair value on initial recognition (normally represented by the purchase price) . As a result, the effective interest is credit-adjusted . Interest income is calculated by applying the effective interest rate to the gross carrying amount of financial assets, except for: i) financial assets that have become credit-impaired (Stage 3), for which interest revenue is calculated by applying the effec- tive interest rate to their AC (net of the ECL provision); and ii) financial assets that are purchased or originated credit-impaired, for which the original credit-adjusted effective interest rate is applied to the AC . Other income and expense recognition. All other income is generally recorded on an accrual basis by reference to completion of the specific performance obligation assessed on the basis of measurement of the Company’s progress towards complete satisfaction of that performance obligation . All other expenses are generally recorded on an accrual basis by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided . Other similar income. Other similar income represents interest income recorded for debt instruments measured at fair value through profit or loss (“FVTPL”) and is recognised on an accrual basis using nominal interest rate . Other similar expense. Other similar expense represents finance cost related to the discounted lease payments using the incremental borrowing rate . Foreign currency translation. The functional currency of the Company is the national currency of the Russian Federation, Russian Rouble (“RR”), as, based on the principles of the International Accounting Standard IAS 21 “The Effects of Changes in Foreign Exchange Rates”, this currency reflects the economic substance of the underlying events and circumstances of the Company . The Russian Rouble is also the presentation currency of the Company . Foreign exchange gains and losses resulting from the translation of monetary assets and liabilities into each entity’s functional currency at year-end official exchange rates of the CBRF are recognised in profit or loss for the year as Net gains/(losses) from foreign exchange translation . Foreign exchange gains and losses resulting from the settlement of transactions with foreign currencies are recognised in profit or loss for the year as Net gains from operations with foreign currencies . At 31 December 2019 the rate of exchange used for translating foreign currency balances was USD 1 = RR 61 .9057 (31 December 2018: USD 1 = RR 69 .4706), and the average rate of exchange was USD 1 = RR 64 .7362 (2018: USD 1 = RR 62 .7078) . Offsetting. Financial assets and liabilities are offset and the net amount reported in the separate statement of financial posi- tion only when there is a legally enforceable right to offset the recognised amounts, and there is an intention to either settle on a net basis, or to realise the asset and settle the liability simultaneously . Such a right of set off (a) must not be contingent on a future event and (b) must be legally enforceable in all of the following circumstances: (i) in the normal course of business, (ii) the event of default and (iii) the event of insolvency or bankruptcy . Amendments of the separate financial statements after issue. The Board of Directors of the Company has the power to amend the separate financial statements after issue . F-167 F-168 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Separate Financial Statements (Continued) 3 Significant Accounting Policies (Continued) Changes in presentation. In these separate financial statements the management of the Company improved the presentation of the results of operations with foreign currencies, derivatives revaluation and foreign exchange translation and disclosed separately in the separate statement of profit or loss and other comprehensive income the following line items: Net gains from operations with foreign currencies, Net (losses)/gains from derivatives revaluation, Net gains/(losses) from foreign exchange translation . The effect of changes described above on the separate statement of profit or loss and other comprehensive income for the year ended 31 December 2018 is as follows: In millions of RR Net (losses)/gains from derivatives revaluation Net gains/(losses) from foreign exchange translation Net gains from operations with foreign currencies As originally presented - - 173 Reclassification As reclassified 538 (560) 22 538 (560) 195 The effect of changes described above on the separate statement of cash flows for the year ended 31 December 2018 is as follows: In millions of RR Cash (paid)/received from operations with financial derivatives Cash received from trading in foreign currencies Cash received from trading in foreign currencies and operations with financial derivatives As originally presented Reclassification As reclassified - - 537 342 195 (537) 342 195 - 4 Critical Accounting Estimates and Judgements in Applying Accounting Policies The Company makes estimates and assumptions that affect the amounts recognised in the separate financial statements and the carrying amounts of assets and liabilities within the next financial year . Estimates and judgements are continually evaluat- ed and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances . Management also makes certain judgements, apart from those involving estimations, in the process of applying the accounting policies . Judgements that have the most significant effect on the amounts recog- nised in the separate financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year include: Investments in subsidiaries. The estimated fair value of investments in subsidiaries recognises that the majority of the value of TCS Group Holding PLC resides in its main operating subsidiaries . Thus in estimating the fair value of the subsidiaries the primary input is the market quote of the Company’s GDRs which are traded on the London Stock Exchange . Other inputs include the estimated fair value of the assets and liabilities held by the Company other than its investment in the subsidiaries . Refer to Note 21 . Perpetual subordinated bonds. The Company from time to time invests in perpetual subordinated bonds issued by third par- ties . The Company has taken into consideration that there are genuine contingent settlement provisions that could arise and as such has classified the investments in perpetual subordinated bonds as investments in debt securities on the basis of terms of issue which stipulate the possible redemption of the instrument in several cases other than liquidation of the issuer . The investments in these instruments are classified as debt investment securities measured at FVTPL since the analysis of the contrac- tual cash flow characteristics resulted in acquired perpetual bonds not passing SPPI test . If the Company had recognized this instrument as equity instrument, then it could have been measured at FVTPL or FVOCI as the Company does not hold it for trading purposes . Initial recognition of related party transactions. In the normal course of business the Company enters into transactions with its related parties . IFRS 9 requires initial recognition of financial instruments based on their fair values . Judgement is applied in determining if transactions are priced at market or non-market interest rates, where there is no active market for such transactions . The basis for judgement is pricing for similar types of transactions with unrelated parties and effective interest rate analysis . Terms and conditions of related party balances are disclosed in Note 23 . Determination of functional currency. The Company follows the guidance of IAS 21 “The Effects of Changes in Foreign Ex- change Rates” for the determination of the functional currency of the Company . The Company’s functional currency is RR . Tax legislation. Cypriot and Russian tax, currency and customs legislation are subject to varying interpretations . Refer to Note 20 . 5 Adoption of New or Revised Standards and Interpretations Certain new standards, interpretations and amendments to the existing standards, as disclosed in the consolidated financial statements for the year ended 31 December 2018, became effective for the Company from 1 January 2019 . Adoption of IFRS 16, Leases (issued on 13 January 2016 and effective for annual periods beginning on or after 1 Janu- ary 2019). The Company has adopted IFRS 16 with a date of transition of 1 January 2019 and applied the standard using the modified retrospective method, without restatement of comparatives (Note 3) . The new standard sets out the principles for the recognition, measurement, presentation and disclosure of leases . All leases result in the lessee obtaining the right to use an asset at the start of the lease and, if lease payments are made over time, also obtaining financing . Accordingly, IFRS 16 eliminates the classification of leases as either operating leases or finance leases as is required by IAS 17 and, instead, introduces a single lessee accounting model . On adoption of IFRS 16, the Company recognised a right of use asset of RR 6 million against a corresponding lease liability . Right-of-use assets are mainly represented by leases of office premises . A reconciliation of the operating lease commitments as of 31 December 2018 and the lease liability recognized at 1 January 2019 is as follows: In millions of RR Lease payments under operating lease Future lease payments under IFRS 16 Effect of discounting Lease liabilities under IFRS 16 Right-of-use assets under IFRS 16 1 January 2019 7 7 (1) 6 6 The following amended standards became effective from 1 January 2019, but did not have any material impact on the Company: • IFRIC 23 "Uncertainty over Income Tax Treatments" (issued on 7 June 2017 and effective for annual periods beginning on or after 1 January 2019) . • Prepayment Features with Negative Compensation – Amendments to IFRS 9 (issued on 12 October 2017 and effective for annual periods beginning on or after 1 January 2019) . • Amendments to IAS 28 “Long-term Interests in Associates and Joint Ventures” (issued on 12 October 2017 and effective for annual periods beginning on or after 1 January 2019) . • Annual Improvements to IFRSs 2015-2017 cycle – amendments to IFRS 3, IFRS 11, IAS 12 and IAS 23 (issued on 12 De- cember 2017 and effective for annual periods beginning on or after 1 January 2019) . • Amendments to IAS 19 “Plan Amendment, Curtailment or Settlement” (issued on 7 February 2018 and effective for annual periods beginning on or after 1 January 2019) . F-169 F-170 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Separate Financial Statements (Continued) 6 New Accounting Pronouncements Certain new amendments have been issued that are mandatory for the annual periods beginning on or after 1 January 2020: Interest rate benchmark reform – Amendments to IFRS 9, IAS 39 and IFRS 7 (issued on 26 September 2019 and effective for annual periods beginning on or after 1 January 2020). The amendments were triggered by replacement of benchmark interest rates such as LIBOR and other inter-bank offered rates (‘IBORs’) . The amendments provide temporary relief from applying specific hedge accounting requirements to hedging relationships directly affected by the IBOR reform . The table below discloses the credit quality of cash and cash equivalents balances based on credit risk grades at 31 December 2018 . The gross carrying amount of cash and cash equivalents at 31 December 2018 below also represents the Company's maximum exposure to credit risk on these assets: In millions of RR Placements with other banks with original maturities of less than three months Excellent Sub-standard Total 760 1 761 The following other new pronouncements are not expected to have any material impact on the Company when adopted: Total cash and cash equivalents (a) IFRS 17 "Insurance Contracts"(issued on 18 May 2017 and effective for annual periods beginning on or after 1 January 2021)* . (b) Amendments to the Conceptual Framework for Financial Reporting (issued on 29 March 2018 and effective for annual periods beginning on or after 1 January 2020) . (c) Amendments to IFRS 3: Definition of a business (issued on 22 October 2018 and effective for acquisitions from the begin- ning of annual reporting period that starts on or after 1 January 2020)* . (d) Amendments to IAS 1 and IAS 8: Definition of materiality (issued on 31 October 2018 and effective for annual periods beginning on or after 1 January 2020) . (e) Amendments to IAS 1: Classification of liabilities as current or non-current (issued on 23 January 2020 and effective for annual periods beginning on or after 1 January 2022)* . (f) Amendments to IFRS 10 and IAS 28: Sale or contribution of assets between an Investor and its associate or joint venture Refer to Note 19 for the description of the Company’s credit risk grading system . For the purpose of ECL measurement cash and cash equivalents balances are included in Stage 1 . The ECL for these balanc- es represents an immaterial amount, therefore the Company did not recognise any credit loss allowance for cash and cash equivalents . Amounts of cash and cash equivalents are not collateralised . Refer to Note 19 for the ECL measurement approach . Interest rate, maturity and geographical risk concentration analysis of cash and cash equivalents is disclosed in Note 19 . Infor- mation on related party balances is disclosed in Note 23 . Refer to Note 21 for the disclosure of the fair value of cash and cash equivalents . 8 Loans and Deposit Placements with Related Parties In millions of RR 31 December 2019 31 December 2018 (issued on 11 September 2014 and effective for annual periods beginning on or after a date to be determined by the IASB)* . Deposit placements with subsidiary Bank The Company is currently assessing the impact of the above standards on its separate financial statements . Total loans and deposit placements with related parties 5,594 5,594 379 379 * Denotes standards, interpretations and amendments which have not yet been endorsed by the European Union . 7 Cash and Cash Equivalents In millions of RR Placements with other banks with original maturities of less than three months - placements with UK Bank (A+ rated) - placements with European bank (CCC+ rated) - placements with European bank (B rated) Total Cash and Cash Equivalents 31 December 2019 31 December 2018 596 2 - 598 760 - 1 761 The table below discloses the credit quality of cash and cash equivalents balances based on credit risk grades at 31 December 2019 . The gross carrying amount of cash and cash equivalents at 31 December 2019 below also represents the Company's maximum exposure to credit risk on these assets: In millions of RR Placements with other banks with original maturities of less than three months Excellent Doubtful Total cash and cash equivalents Total 596 2 598 At 31 December 2019 the deposit placements with subsidiary Bank are represented by three deposits: deposit placement in USD with a nominal value of RR 2,114 million at 2 .5% per annum maturing on 10 August 2020, deposit placement in EUR with a nominal value of RR 1,806 million at 0 .35% per annum maturing on 7 February 2020, deposit placement in RR with a nominal value of RR 1,674 million at 7 .5% per annum maturing on 25 December 2020 . At 31 December 2018 the deposit placements with subsidiary Bank are represented by a deposit with a nominal value of RR 379 million at 8 .5% per annum maturing on 14 September 2019 . For the purpose of ECL measurement deposit placements with subsidiary Bank balances are included in Stage 1 . The ECL for these balances represents an immaterial amount, therefore the Company did not create any credit loss allowance for deposit placements with subsidiary Bank . Refer to Note 19 for the ECL measurement approach . As at 31 December 2019 for the purpose of credit risk measurement loans and deposit placements with related parties bal- ances are included in “Monitor” credit risk grade based on credit risk grademaster scale (31 December 2018: same) . Refer to Note 19 for the description of the credit risk grading system . Refer to Note 21 for the disclosure of the fair value of loans and deposit placements with related parties . Interest rate, maturi- ty and geographical risk concentration analysis are disclosed in Note 19 . Information on related party balances is disclosed in Note 23 . F-171 F-172 * Denotes standards, interpretations and amendments which have not yet been endorsed by the European Union . STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Separate Financial Statements (Continued) Investments in Equity Securities 9 In millions of RR Investments in subsidiaries, including: - Investments in financial institutions - Investments in non-financial institutions Other investments in equity securities Total investments in equity securities 31 December 2019 31 December 2018 256,443 231,459 24,984 850 257,293 218,818 203,192 15,626 431 219,249 As at 31 December 2019 investments in financial institutions include investments in share capital of JSC “Tinkoff Bank”, JSC “Tinkoff Insurance”, LLC "Microfinance company “Т-Finans” (2018: same) . As at 31 December 2019 investments in non-financial institutions include investments in share capital of LLC “CloudPay- ments”, LLC “Тinkoff Mobile”, LLC “Phoenix”, Tinkoff Software DC, LLC “TCS”, LLC “Fintech DC”, LLC “Tinkoff Capital” and ANO “Tinkoff Education” (2018: LLC LLC “CloudPayments”, LLC “Тinkoff Mobile”, LLC “Phoenix”, Tinkoff Software DC, LLC TCS and Goward Group Limited) . On 16 April 2019 Goward Group Limited was liquidated . The Bank is registered in the Russian Federation and was purchased by the Company in November 2006 (Note 1) . The Bank is 100% owned and controlled by the Company . The Insurance Company is registered in the Russian Federation and was purchased by the Company in August 2013 (Note 1) . In June 2019 the Company sold 10% in the Insurance Company for cash consideration of RR 206 million, there were no transfers of any cumulative gain or loss within equity relating to these changes . As at 31 December 2019 the Company owns 80 .08% of the shares of the Insurance Company and controls it, the Bank owns 9 .92% of the shares of the Insurance Compa- ny (2018: the Company owns 90 .08%, the Bank owns 9 .92%) . In October 2017 the Company acquired a 55% shareholding in LLC “CloudPayments” . During 2019 the Bank acquired a 40% shareholding in LLC “CloudPayments”, and thus the Company owns directly and indirectly a 95% holding in the shares of LLC “CloudPayments” . Investments in subsidiaries are stated at fair value at the end of each reporting period (Notes 3, 4 and 21) . The movements in investments in subsidiaries for the period ended 31 December 2019 are as follows: In millions of RR Carrying amount at 1 January Investments in subsidiaries Revaluation of investment in subsidiaries Share-based payment Carrying amount at 31 December 2019 218,818 (206) 37,362 469 256,443 The movements in investments in subsidiaries for the period ended 31 December 2018 are as follows: In millions of RR Carrying amount at 1 January Investments in subsidiaries Revaluation of investment in subsidiaries Share-based payment Carrying amount at 31 December Dividend income from investments in subsidiaries recognised during the year is as follows: In millions of RR Investment in JSC “Tinkoff Bank” Investment in JSC “Tinkoff Insurance” Total dividend income 2018 207,834 206 10,148 630 218,818 2019 12,697 4,461 17,158 2018 - 1,351 1,351 Interest rate, maturity and geographical risk concentration analysis of investment in equity securities are disclosed in Note 19 . Refer to Note 21 for the disclosure of the fair value of investments in equity securities . 10 Loans Received In millions of RR Loans from subsidiary Bank Loans from subsidiary company Loans from other companies Total loans received 2019 - - - - 2018 20,655 1,792 796 23,243 As at 31 December 2018 loans from subsidiary Bank had contractual maturities from 30 October 2019 to 29 October 2021 and nominal interest rate from 5 .5% to 7% . In 2019 loans were repaid before maturity . As at 31 December 2018 loans from a subsidiary company have a contractual maturity from 15 March 2020 and 6 June 2021 and nominal interest rate from 5 .5% to 7% . In 2019 loans were repaid before maturity . As at 31 December 2018 loans from other companies represent a loan from related party in the amount of RR 796 million, which has a contractual maturity 20 December 2019 and nominal interest rate 4% . The loan was repaid before maturity . Loans received were unsecured (2018: unsecured) . Refer to Note 21 for the disclosure of the fair value of loans received . Interest rate, maturity and geographical risk concentra- tion analyses of loans received is disclosed in Note 19 . Information on related party balances is disclosed in Note 23 . Reconcil- iation of liabilities arising from financing activities is disclosed in Note 18 . F-173 F-174 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Separate Financial Statements (Continued) 11 Debt Securities in Issue 13 Share Capital In millions of RR Date of maturity 31 December 2019 31 December 2018 EUR denominated ECP issued in December 2019 20 November 2020 1,030 EUR denominated ECP issued in February 2019 18 February 2020 USD denominated ECP issued in December 2019 20 November 2020 EUR denominated ECP issued in December 2018 USD denominated ECP issued in December 2018 RR denominated ECP issued in December 2018 Total Debt Securities in Issue 19 December 2019 19 December 2019 19 December 2019 831 599 - - - 2,460 - - - 2,392 1,266 96 3,754 On 20 December 2019 the Company issued two tranches of Euro-Commercial Paper (ECP) denominated in USD and EUR maturing on 20 November 2020 . USD denominated ECP has a nominal value of USD 10 million at 3 .6% coupon rate . EUR denominated ECP has a nominal value of EUR 15 million at 1 .0% coupon rate . On 19 February 2019 the Company issued Euro-Commercial Paper (ECP) denominated in EUR maturing on 18 February 2020 . EUR denominated ECP has a nominal value of EUR 12 million at 1 .25% coupon rate . On 20 December 2018 the Company issued three tranches of Euro-Commercial Paper (ECP) denominated in USD, EUR and RR maturing on 19 December 2019 . USD denominated ECP has a nominal value of USD 19 million at 4 .25% coupon rate . EUR denominated ECP has a nominal value of EUR 30 .5 million at 1 .25% coupon rate . RR denominated ECP has a nominal value of RR 105 million at 9 .5% coupon rate . The Company redeemed all outstanding ECP of this issue at maturity . Refer to Note 21 for the disclosure of the fair value of debt securities in issue . Maturity analysis of debt securities in issue are disclosed in Note 19 . Reconciliation of liabilities arising from financing activities is disclosed in Note 18 . 12 Other Financial and Non-financial Liabilities In millions of RR Other Financial Liabilities Advances payable Accrued audit and accountancy fees Enhanced exclusivity agreement payable Total Other Financial Liabilities Other Non-financial Liabilities Dividends payable under GDRs repurchased for MLTIP purposes Other provision Total Other Non-financial Liabilities 31 December 2019 31 December 2018 63 18 - 81 582 3 585 - 14 208 222 760 3 763 Interest rate, maturity and geographical risk concentration analysis of other financial liabilities are disclosed in Note 19 . Refer to Note 21 for disclosure of fair value of other financial liabilities . In millions of RR except for the number of shares Number of authorized shares Number of outstanding shares Ordinary shares Share premi- um Treasury shares At 1 January 2018 190,479,500 182,638,825 188 8,623 (1,587) Total 7,224 Increase of number of autho- rized shares 1,291,266 GDRs buy-back GDRs and shares transferred under MLTIP - - - - - At 31 December 2018 191,770,766 182,638,825 Shares issued 18,263,882 16,666,667 Secondary public offering costs GDRs and shares transferred under MLTIP - - - - - - - 188 42 - - - - (2,455) (2 455) - - - 372 8,623 (3,670) 18,874 (499) - - 372 5,141 18,916 (499) - 506 506 At 31 December 2019 210,034,648 199,305,492 230 26,998 (3,164) 24,064 During three months ended 31 March 2019 Altoville Holdings Limited converted 6,385,310 “Class B” shares into “Class A” (on a one-to-one basis), which was 3 .49% of its share, and then sold them to the market . On 2 July 2019 the Company completed a SPO on the London Stock Exchange plc . and issued 16,666,667 “Class A” shares of the Company in the form of GDRs at a price of USD 18 .00 per GDR (RR 1,135 per GDR), raising aggregate gross proceeds of USD 300 million (RR 18,916 million) . All issued ordinary shares are fully paid . All the incurred SPO costs were primary direct expenses accounted within share premium . At 31 December 2019 the total number of outstanding shares is 199,305,492 shares (2018: 182,638,825 shares) with a par value of USD 0 .04 per share (2018: USD 0 .04 per share) . In June 2019 the Company’s shareholders approved a resolution to increase authorised share capital to USD 8,401,385 .92 by the creation of 18,263,882 new undesignated ordinary shares of nominal value USD 0 .04 each . In May 2018 the Company’s shareholders approved a resolution to increase authorized share capital to USD 7,670,830 .64 by the creation of 1,291,266 new undesignated ordinary shares of nominal value USD 0 .04 each . At 31 December 2019 the total number of authorised shares is 210,034,648 shares (2018: 191,770,766 shares) with a par value of USD 0 .04 per share (2018: USD 0 .04 per share) . At 31 December 2019 the total number of treasury shares is 4,185,166 (2018: 6,604,353) . As at 31 December 2019 and 2018 treasury shares represent GDRs of the Company repurchased from the market for the purposes permitted by Cyprus law including contribution to MLTIP . Refer to Note 23 . During the year ended 31 December 2019 no GDRs were repurchased by the Company (2018: 2,094,126 GDRs at market price for RR 2,455 million) . Refer to Note 23 . Information on dividends is disclosed in Note 17 . F-175 F-176 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Separate Financial Statements (Continued) 14 Interest income and expense In millions of RR Interest income calculated using the effective interest rate method Loans and deposit placement with related parties, including: Deposit placement with subsidiary Bank Subordinated loans to subsidiary Bank Debt securities and repurchase receivables at FVOCI Total Interest income calculated using the effective interest rate method Other similar income Debt securities and repurchase receivables at FVTPL Total Interest Income Interest expense calculated using the effective interest rate method Loans from subsidiary Bank Euro-Commercial Papers Loans from subsidiary company Other loans received Total Interest expense calculated using the effective interest rate method Net interest expense 2019 2018 228 - 44 272 28 300 536 100 86 10 732 (432) 46 32 29 107 84 191 1,161 124 104 15 1,404 (1,213) 15 Administrative and Other Operating Expenses In millions of RR 2019 2018 Legal and consulting fees Staff costs Audit and accountancy fees Taxes other than income tax Depreciation of right-of-use assets Depreciation of tangible fixed assets Enhanced exclusivity agreement expense Other administrative expenses Total administrative and other operating expenses 110 99 30 5 3 1 - 3 251 92 10 32 - - - 208 5 347 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 2019 amounted to RR 2 .8 million (2018: RR 2 .7 million) . The total fees charged by the Company's statutory auditor for the year ended 31 December 2019 for other assurance services amounted to RR 3 .8 million (2018: RR 4 .7 million), for tax advisory services amounted to RR 2 .3 million (2018: RR 5 .7 million) and for other non-assurance services amounted to RR 2 .2 million (2018: nil) . Included in staff costs are statutory social contributions to the non-budget funds and share-based remuneration: In millions of RR Statutory social contribution to the non-budget funds 2019 12 2018 2 At 31 December 2019 there are 63 employees employed by the Company (31 December 2018: 29) . The average number of employees employed by the Company during the reporting year was 53 (2018: 23) . 16 Income Taxes Income tax expense comprises the following: In millions of RR Corporation tax Overseas tax withheld at source Total income tax expense 2019 26 858 884 2018 19 67 86 The tax on the Company’s profit before tax differs from the theoretical amount that would arise using the applicable tax rates as follows: In millions of RR Profit/(Loss) before income tax Theoretical tax charge at statutory rate of 12 .5% (2018: 12 .5%) Tax effect of expenses not deductible for tax purposes Tax effect of allowances and income not subject to tax Overseas tax withheld at source Under provision of tax for prior year Income tax expenses for the year 2019 16,700 2,088 111 (2,191) 858 18 884 2018 63 8 217 (214) 67 8 86 Gains on disposal of qualifying titles (including shares, bonds, debentures, rights thereon etc .) are exempt from Cyprus income tax . At 31 December 2019 and 2018 the Company had no tax losses carried forward . Differences between IFRS and statutory taxation regulations in Cyprus give rise to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their tax bases . The tax effect of the movements in these temporary differences is detailed below . In millions of RR Investments in subsidiaries Net deferred tax liabilities In millions of RR Investments in subsidiaries Net deferred tax liabilities 31 December 2018 Credited to OCI 31 December 2019 (1,187) (1,187) 1,019 1,019 (168) (168) 31 December 2017 Charged to OCI 31 December 2018 (565) (565) (622) (622) (1,187) (1,187) The Government of the Russian Federation requested Ministry of Finance of the Russian Federation to make review of existing double tax treaties and submit by 24 April to the Government the draft regulation approving the drafts of double tax treaties to increase tax rates on dividends to a level of at least 15% from 1 January 2021 . F-177 F-178 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Separate Financial Statements (Continued) 17 Dividends The movement in dividends during the year are as follows: In millions of RR Dividends payable at 1 January Dividends declared during the year Dividends paid during the year Dividends paid under MLTIP after vesting date Foreign exchange loss on dividends payable Dividends payable at 31 December Dividends per share declared during the year (in USD) Dividends per share paid during the year (in USD) 2019 760 5,856 (5,601) (524) 91 582 0.49 0.49 2018 377 12,265 (11,946) (144) 208 760 1.07 1.07 Dividends declared in the table above represent dividends declared by the Board of Directors and are reduced by RR 25 million for the year ended 31 December 2019 due to dividends on GDRs acquired by the Company from the market not for the immediate purposes of the existing MLTIP . On 13 May 2019 the Board of Directors declared an interim dividend of USD 0 .17 (RR 11 .09) per share/per GDR amounting to USD 31 .05 million (RR 2,026 million) . Declared dividends were paid in USD on 28 and 30 May 2019 . On 11 March 2019 the Board of Directors declared an interim dividend of USD 0 .32 (RR 21 .11) per share/per GDR amounting to USD 58 .4 million (RR 3,855 million) . Declared dividends were paid in USD on 25 and 27 March 2019 . On 25 November 2018 the Board of Directors declared an interim dividend of USD 0 .28 (RR 18 .39) per share/per GDR amounting to USD 51 .1 million (RR 3,358 million) . Declared dividends were paid in USD in December 2018 . On 27 August 2018 the Board of Directors declared a regular interim dividend of USD 0 .24 (RR 16 .27) per share/per GDR amounting to RR USD 43 .9 million (2,972 million) . Declared dividends were paid in USD on 24, 28 and 29 September 2018 . On 29 May 2018 the Board of Directors declared a regular interim dividend of USD 0 .24 (RR 14 .95) per share/per GDR amounting to USD 43 .8 million (RR 2,730 million) . Declared dividends were paid in USD on 21 and 27 June 2018 . On 9 March 2018 the Board of Directors declared a regular interim dividend of USD 0 .31 (RR 17 .61) per share/per GDR amounting to USD 56 .6 million (RR 3,216 million) . Declared dividends were paid in USD on 4 and 9 April 2018 . Dividends were declared and paid in USD throughout the years ended 31 December 2019 and 2018 . Dividends payable at 31 December 2019 related to treasury shares acquired under MLTIP amounting to RR 582 million are included in other non-finan- cial liabilities (31 December 2018: RR 760 million) . On 11 June 2019 the Company announced suspension of dividend payments for the three months ended 30 June and 30 September 2019 to ensure the Group will have the necessary capital to further support credit portfolio growth . 18 Reconciliation of Liabilities Arising from Financing Activities The table below sets out an analysis of the Company’s debt and the movements in the Company’s debt for each of the periods presented . The debt items are those that are reported as financing in the separate statement of cash flows . In millions of RR Debt securities in issue Loans received Liabilities from financing activities Net debt at 1 January 2018 Cash flows Realised foreign exchange adjustments Unrealised foreign exchange adjustments Other non-cash movements Net debt at 31 December 2018 Cash flows Realised foreign exchange adjustments Unrealised foreign exchange adjustments Other non-cash movements Net debt at 31 December 2019 2,769 418 435 132 - 3,754 (891) (336) (67) - 2,460 7,833 14,955 - - 455 23,243 (23,092) - 45 (196) - Total 10,602 15,373 435 132 455 26,997 (23,983) (336) (22) (196) 2,460 19 Financial Risk Management The risk management function within the Company is carried out in respect of financial risks (credit, market, currency, liquidity and interest rate), operational risks and legal risks . The primary objectives of the financial risk management function are to es- tablish risk limits, and then ensure that exposure to risks stays within these limits . The operational and legal risk management functions are intended to ensure proper functioning of internal policies and procedures to minimise operational and legal risks . Credit risk. The Company takes on exposure to credit risk which is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation . Exposure to credit risk arises as a result of the debt financial instruments, cash and cash equivalents and Company’s lending and other transactions with counterparties giving rise to financial assets . The Company’s maximum exposure to credit risk is reflected in the carrying amounts of financial assets on the separate statement of financial position . The impact of possible netting of assets and liabilities to reduce potential credit exposure is not significant . The credit risk is controlled by management of the Company, by approving limits on the level of credit risk by borrowers . F-179 F-180 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Separate Financial Statements (Continued) 19 Financial Risk Management (Continued) Credit risk grading system. For measuring credit risk and grading financial instruments by the level of credit risk, the Compa- ny applies risk grades estimated by external international rating agencies in case these financial instruments have risk grades estimated by external international rating agencies (Fitch 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 Excellent Good Monitor Sub-standard Doubtful Default Corresponding ratings of external international rating agency (Fitch) AAA, AA+ to AA-, A+ to A- BBB+ to BBB-, BB+ BB to B+ B, B- CCC+ to CC- C, D Each master scale credit risk grade is assigned a specific degree of creditworthiness: • Excellent – high credit quality with lowest or very low expected credit risk; • Good – good credit quality with currently 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 . For measuring credit risk and grading those financial instruments which do not have risk grades estimated by external interna- tional rating agencies, the Company applies risk grades and the corresponding range of probabilities of default (PD): Master scale credit risk grade Corresponding interval 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 Company: Default occurs when a financial asset is 90 days past due . 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 Company 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 effec- tive interest rate (EIR) for the financial instrument or an approximation thereof . Lifetime period – the maximum period over which ECL should be measured . For financial instruments held by the Company the life- time period is equal to contractual maturity of the respective financial instruments . 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 . Credit Conversion Factor (CCF) – a coefficient that shows that the probability of conversion of an off-balance sheet amount to exposure on the 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 Company considers that 12-month and lifetime CCFs are the same . 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 Company . Excellent Good Monitor Sub-standard NPL non-overdue for the last 12 months with PD < 5% or with early repayments 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 . all other non-overdue loans 1-30 days overdue 31-90 days overdue 90+ days overdue 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 appropri- ateness by the Company’s Risk Management Department . The Company considers a financial instrument to have experienced a SICR when one or more of the following quantitative, qualitative or backstop criteria have been met: The condition of early repayments is satisfied, as described in the table above, if the cumulative amount of early repayments exceed 5% of the gross carrying amount at the date of recognition of the loan . • 30 days past due; • award of risk grade “Doubtful”; Each master scale credit risk grade is assigned a specific degree of creditworthiness: • decrease of assigned external rating by 2 notches, which corresponds to an approximate increase of PD by 2 .5 times . • Excellent – strong credit quality with minimum expected credit risk; • Good – adequate credit quality with low expected credit risk; • Monitor – adequate credit quality with a moderate credit risk; • Sub-standard – low credit quality with a substantial credit risk; • NPL – financial instruments for which a default has occured . The rating models are regularly reviewed by the Credit Risk Department, backtested on actual default data and updated if necessary . If the SICR criteria are no longer met, the instrument will be transferred back to Stage 1 . General principle of techniques applied For financial assets, ECLs are generally measured based on the risk of default over one of two different time periods, depend- ing on whether or not the credit risk of the borrower has increased significantly since initial recognition . F-181 F-182 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019• Stage 1 – a financial instrument that is not credit-impaired on initial recognition and its credit risk has not increased signifi- cantly since initial recognition, the loss allowance is based on 12-month ECLs; In millions of RR • Stage 2 – if since the date, which was assumed to be the date of initial recognition has identified a SICR, the financial instru- USD strengthening by 20% (2018: by 20%) 31 DECEMBER 2019 Notes to the Separate Financial Statements (Continued) 19 Financial Risk Management (Continued) This approach can be summarised in a three-stage model for ECL measurement: ment 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 . The Group carries out the following approach for ECL measurement: • For financial instruments which have external ratings – assessment based on external ratings; • For financial instruments which do not have external ratings – assessment based on discounted cash flow technique . 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 statis- tics published by international rating agencies (Fitch and in case of their absence – Moody’s or Standard & Poor’s) . Market risk. The Company takes on exposure to market risks . Market risks arise from open positions in (a) currency, (b) inter- est rate and (c) equity products, all of which are exposed to general and specific market movements . Management sets limits on the value of risk that may be accepted, which are 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 . 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 summarises the Company’s exposure to foreign currency exchange rate risk at the end of the reporting period: At 31 December 2019 At 31 December 2018 Non-deriv- ative mone- tary financial assets Non-deriv- ative mone- tary financial liabilities Deriva- tives Net balance sheet posi- tion Non-deriv- ative mone- tary financial Non-deriv- ative mone- tary financial assets liabilities Derivatives Net balance sheet posi- tion 1,738 2,710 - (677) 1,808 (1,864) 6,256 (2,541) - - - - 1,738 2,033 (56) 1,679 (22,557) (4,258) (25,136) 1,185 (2,062) 1,935 1,058 1 (2,600) 2,408 (191) 3,715 2,865 (27,219) 85 (24,269) In millions of RR RR US Dollars EUR Total The above analysis includes only monetary assets and liabilities . Non-monetary assets are not considered to give rise to any material currency risk . 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 2019 At 31 December 2018 Impact on profit for the year Impact on total equity Impact on profit for the year Impact on total equity 385 (385) (11) 11 385 (385) (11) 11 (77) 77 14 (14) (77) 77 14 (14) USD weakening by 20% (2018: by 20%) EUR strengthening by 20% (2018: by 20%) EUR weakening by 20% (2018: by 20%) Interest rate risk. The Company 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 of unexpected movements . Management monitors on a daily basis and sets limits on the level of mismatch of interest rate repricing that may be undertaken . The table below summarises the Company’s exposure to interest rate risk . The table presents the aggregated amounts of the Company’s financial assets and liabilities at carrying amounts, categorised by the earlier of contractual interest repricing or maturity dates . On demand and less than 1 month From 1 to 6 months From 6 to 12 months More than 1 year Non-inter- est bearing financial instruments Total 598 1,870 3,788 Total financial liabilities - (912) (1,629) Net interest sensitivity gap at 31 December 2019 598 958 2,159 - - - 257,293 263,549 - (2,541) 257,293 261,008 At 31 December 2019 if interest rates at that date had been 200 basis points higher/lower (2018: 200 basis points higher/ lower), with all other variables held constant, profit and equity would have been RR 72 million higher/lower (2018: RR 455 million higher/lower) . In millions of RR 31 December 2018 Total financial assets Total financial liabilities Net interest sensitivity gap at 31 December 2018 On demand and less than 1 month From 1 to 6 months From 6 to 12 months More than 1 year Non-inter- est bearing financial instru- ments Total 2,147 (15) - 379 425 219,249 222,200 (208) (4,643) (22,354) - (27,220) 2,132 (208) (4,264) (21,929) 219,249 194,980 In millions of RR 31 December 2019 Total financial assets F-183 F-184 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Separate Financial Statements (Continued) 19 Financial Risk Management (Continued) The Company monitors interest rates for its financial instruments . The table below summarises effective interest rates set as at 31 December 2019 and 2018 based on reports reviewed by key management personnel: In % p.a. Assets 2019 2018 RR USD EUR RR USD EUR Cash and cash equivalents - - - - Loans and deposit placements with related parties - Deposit placements with subsidiary Bank 7 .5 2 .5 0 .4 8 .5 - - Investments in debt securities Liabilities Loans received Debt securities in issue - - - - - - - 3 .8 1 .2 - 10 .3 8 .0 9 .8 4 .4 4 .4 - 1 .4 - - - The sign “-” in the table above means that the Company does not have the respective assets or liabilities in the corresponding currency . Other price risk. The Company has exposure to equity price risk mainly as a result of a decrease in the fair value of invest- ments in subsidiaries . Sensitivity analysis of investments in subsidiaries is disclosed in Note 21 . Geographical risk concentrations. The geographical concentration of the Company’s financial assets and liabilities at 31 De- cember 2019 is set out below: The geographical concentration of the Company’s financial assets and liabilities at 31 December 2018 is set out below: In millions of RR Financial assets Cash and cash equivalents Loans and deposit placements with related parties Financial derivatives Investments in debt securities Investments in equity securities Other financial assets Total financial assets Financial liabilities Loans received Debt securities in issue Financial derivatives Other financial liabilities Total financial liabilities Net separate statement of financial position Russian Fed- eration OECD Other Non- OECD 1 379 - 411 219,249 1,300 760 - 86 - - - - - - 14 - - Total 761 379 86 425 219,249 1,300 221,340 846 14 222,200 22,447 3,754 - 14 26,215 195,125 - - 1 - 1 796 23,243 - - 208 3,754 1 222 1,004 27,220 845 (990) 194,980 Assets and liabilities have been based on the country in which the counterparty is located . Cash and cash equivalents have been allocated based on the country in which they are physically held . Russian Federation OECD Other Non- OECD Total Other risk concentrations. Most financial assets are due from the subsidiary Bank . Cash and cash equivalents - 596 In millions of RR Financial assets Loans and deposit placements with related parties Investments in equity securities Other financial assets Total financial assets Financial liabilities Debt securities in issue Other financial liabilities Total financial liabilities Net separate statement of financial position 260,412 5,594 257,293 - - - - 262,887 596 2,460 15 2,475 - 63 63 533 2 - - 64 66 - 3 3 598 5,594 257,293 64 263,549 2,460 81 2,541 63 261,008 Liquidity risk. Liquidity risk is defined as the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities . The table below shows liabilities at 31 December 2019 by their remaining contractual maturity . The amounts disclosed in the maturity table are the contractual undiscounted cash flows . Such undiscounted cash flows differ from the amount included in the separate statement of financial position because the separate statement of financial position amount is based on discount- ed cash flows . When the amount payable is not fixed, the amount disclosed is determined by reference to the conditions exist- ing at the reporting date . Foreign currency payments are translated using the spot exchange rate at the end of the reporting period . The maturity analysis of financial liabilities at 31 December 2019 is as follows: In millions of RR Liabilities Debt securities in issue Other financial liabilities Total potential future pay- ments for financial obligations On Demand and less than 1 month From 1 to 6 months From 6 to 12 months More than 1 year 4 - 4 846 81 927 1,671 - 1,671 - - - Total 2,521 81 2,602 F-185 F-186 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Separate Financial Statements (Continued) 19 Financial Risk Management (Continued) The maturity analysis of financial liabilities at 31 December 2018 is as follows: In millions of RR Liabilities Loans received Debt securities in issue Financial derivatives Other financial liabilities On Demand and less than 1 month From 1 to 6 months From 6 to 12 months More than 1 year Total 133 8 4,258 14 618 40 - 222 881 24,324 25,956 3,895 - 3,943 - - - - 4,258 236 Total potential future payments for finan- cial obligations 4,413 880 4,776 24,324 34,393 20 Contingencies and Commitments Legal proceedings. From time to time and in the normal course of business, claims against the Company may be received . On the basis of its own estimates and internal professional advice management is of the opinion that no material losses will be incurred in respect of any current or potential claims and accordingly no provision has been made in these separate financial statements . Taxation. Cypriot tax legislation is subject to varying interpretations . There are transactions and calculations for which the ultimate tax determination is uncertain . The Company recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due . Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made . The Company is incorporated outside Russia . Tax liabilities of the Company are determined on the assumption that it is not subject to Russian profits tax because it does not have a permanent establishment in Russia . The Company is a tax resident of Cyprus only and full beneficial owner of the Bank and Insurance Company . This interpretation of relevant legislation may be challenged but the impact of any such challenge cannot be reliably estimated currently; however, it may be significant to the financial position and/or the overall operations of the Company . 21 Fair Value of Financial Instruments Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) level one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities, (ii) level two measurements are valuation techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and (iii) level three measurements are valuations not based on observable market data (that is, unobservable inputs) . (a) Recurring fair value measurements Recurring fair value measurements are those that the accounting standards require or permit in the separate statement of financial position at the end of each reporting period . The levels in the fair value hierarchy into which the recurring fair value measurements are categorised are as follows: In millions of RR Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total 31 December 2019 31 December 2018 ASSETS AT FAIR VALUE Financial derivatives Investments in debt secu- rities - - - - - - - - - 86 425 - Investments in subsidiaries - 256,443 - 256,443 - 218,818 - - - 86 425 218,818 Other investments in equity securities Total assets recurring fair value measurements - - 850 850 - - 431 431 - 256,443 850 257,293 425 218,904 431 219,760 Investments in subsidiaries are stated at fair value based on market valuation (2018: same) . The description of valuation techniques and the description of the inputs used in the fair value measurement for level 2 meas- urements at 31 December 2019 are as follows: In millions of RR Fair value Valuation technique Inputs used ASSETS AT FAIR VALUE The estimated fair value of investments in subsid- iaries recognises that the majority of the value of TCS Group Holding PLC resides in its main operating subsidiaries . Thus in estimating the fair value of the subsidiaries the primary input is the market quote of the Company’s GDRs which are traded on the London Stock Exchange . Other in- puts include the estimated fair value of the assets and liabilities held by the Company other than its investment in the subsidiaries Market quote of USD 21 .3 for 1 share at 31 December 2019; Market interest rates Investments in subsidiaries 256,443 Total recurring fair value meas- urements at level 2 256,443 F-187 F-188 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Separate Financial Statements (Continued) 21 Fair Value of Financial Instruments (Continued) The description of valuation techniques and the description of the inputs used in the fair value measurement for level 3 meas- urements at 31 December 2018 are as follows: The description of valuation techniques and the description of the inputs used in the fair value measurement for level 2 meas- urements at 31 December 2018 are as follows: In millions of RR Fair value Valuation technique Inputs used ASSETS AT FAIR VALUE The estimated fair value of investments in subsid- iaries recognises that the majority of the value of TCS Group Holding PLC resides in its main operating subsidiaries . Thus in estimating the fair value of the subsidiaries the primary input is the market quote of the Company’s GDRs which are traded on the London Stock Exchange . Other in- puts include the estimated fair value of the assets and liabilities held by the Company other than its investment in the subsidiaries Market quote of USD 15 .56 for 1 share at 31 De- cember 2018; Market interest rates EUR curve . Investments in subsidiaries 218,818 Foreign exchange swaps Discounted cash flows adjusted for counterparty credit risk 86 USD Dollar Swaps Curve Total recurring fair value meas- urements at level 2 218,904 LIABILITIES AT FAIR VALUE Foreign exchange swaps Total recurring fair value meas- urements at level 2 1 1 Discounted cash flows adjusted for counterparty credit risk EUR curve . USD Dollar Swaps Curve There were no changes in the valuation techniques for level 2 recurring fair value measurements during the years ended 31 December 2019 and 2018 . Level 2 derivatives comprise foreign exchange forwards . At 31 December 2019 if market quote of GDR of the Company at that date had been 60% higher/lower (2018: 39% high- er/lower), with all other variables held constant, the fair value of the investments in equity securities would have been RR 154,370 million higher/lower (2018: RR 74,212 million higher/lower) . In millions of RR ASSETS AT FAIR VALUE Fair value Valuation technique Inputs used Other investments in equity securities Total recurring fair value measurements at level 3 431 431 Cost of acquisition . Share in post-acquisi- tion profit Cost approach (b) Assets and liabilities not measured at fair value but for which fair value is disclosed Fair values analysed by level in the fair value hierarchy and carrying value of assets and liabilities not measured at fair value are as follows: In millions of RR Level 1 Level 2 Level 3 Carrying value Level 1 Level 2 Level 3 Carrying value 31 December 2019 31 December 2018 FINANCIAL ASSETS CARRIED AT AMORTISED COST Cash and cash equivalents Placements with Russian and UK banks Placements with European banks Loans and deposit placements with related parties Deposit placements with subsidiary Bank Other financial assets Total financial assets carried at amortised cost FINANCIAL LIABILITIES CARRIED AT AMORTISED COST Loans received Debt securities in issue - - - - - - - 596 2 - - 596 2 - 5,774 5,594 64 - 64 662 5,774 6,256 - 2,460 - - - - 2,460 81 - - - - - - - - - 760 1 - - 760 1 - 411 379 1,300 - 1,300 2,061 411 2,440 - 22,362 23,243 3,754 222 - - 3,754 222 3,976 22,362 27,219 The description of valuation techniques and the description of the inputs used in the fair value measurement for level 3 meas- urements at 31 December 2019 are as follows: Other financial liabilities - 81 In millions of RR ASSETS AT FAIR VALUE Fair value Valuation technique Inputs used Total financial liabilities carried at amortised cost - 2,541 - 2,541 Other investments in equity securities Total recurring fair value measurements at level 3 850 850 Cost of acquisition . Share in post-acquisi- tion profit Cost approach F-189 F-190 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Separate Financial Statements (Continued) 21 Fair Value of Financial Instruments (Continued) The following table provides a reconciliation of classes of financial assets with these measurement categories as of 31 Decem- ber 2018: Weighted average discount rates used in determining fair value as of 31 December 2019 and 31 December 2018 depend on currency: In % p.a. Assets Cash and cash equivalents Loans and deposit placements with related parties - Deposit placements with subsidiary Bank Investments in debt securities Liabilities Loans received Debt securities in issue 31 December 2019 31 December 2018 0 .0 2 .8 - - 1 .9 - 6 .0 10 .3 7 .0 2 .6 The fair values in level 2 and level 3 of fair value hierarchy were estimated using the discounted cash flows valuation technique . The fair value of floating rate instruments that are not quoted in an active market was estimated to be equal to their carrying amount . The fair value of unquoted fixed interest rate instruments was estimated based on estimated future cash flows expect- ed to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity . 22 Presentation of Financial Instruments by Measurement Category For the purposes of measurement, IFRS 9 “Financial Instruments” classifies financial assets into the following categories: (a) financial assets at FVTPL; (b) financial assets at FVOCI and (c) financial assets at AC . Financial assets at FVTPL have two sub-categories: (i) assets measured at FVTPL mandatorily, and (ii) assets designated as such upon initial recognition . The following table provides a reconciliation of classes of financial assets with these measurement categories as of 31 Decem- ber 2019: FVTPL (man- da-tory) FVTPL (des- igna-ted) FVOCI In millions of RR Cash and cash equivalents Loans and deposit placements with related parties: Deposit placements with subsidiary Bank Investment in equity securities Other financial assets AC 598 5,594 - 64 - - - - - - - - 257,293 257,293 - 64 TOTAL FINANCIAL ASSETS 6,256 - - 257,293 263,549 In millions of RR Cash and cash equivalents Loans and deposit placements with related parties: Subordinated loan to subsidiary Bank Deposit placements with subsidiary Bank Loan to subsidiary Financial derivatives Investment in debt securities Investment in equity securities Other financial assets TOTAL FINANCIAL ASSETS AC 761 - 379 - - - - 1,300 2,440 FVTPL (man- da-tory) FVTPL (des- igna-ted) FVOCI - - - - 86 411 - - 497 - - - - - - - - - Total 761 - 379 - 86 425 - - - - - 14 219,249 219,249 - 1,300 219,263 222,200 As of 31 December 2019 and 2018 all of the Company’s financial liabilities were carried at amortised cost . 23 Related Party Transactions Parties are generally considered to be related if the parties are under common control or one party has the ability to control the other party or can exercise significant influence over the other party in making financial or operational decisions . In consid- ering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form . The outstanding balances with related parties were as follows: In millions of RR ASSETS 31 December 2019 31 December 2018 Subsidiaries Other related parties Subsidiaries Other related parties Other financial assets TOTAL ASSETS LIABILITIES Loans from related parties (contractual interest rate 2018: from 4% to 7% p .a .) Debt securities in issue (discount: 4%) Financial derivatives Other financial liabilities Other non-financial liabilities TOTAL LIABILITIES 64 - 1,300 262,101 850 220,583 - 22,447 2,460 - - 582 - 1 - - - - - - - - 3,042 22,448 5,438 - - 431 - 431 796 3,754 - 208 680 Total 598 5,594 Loans and deposit placement with related parties (con- tractual interest rate 2019: from 0 .35% to 7 .5%, 2018: from 0 .1% to 14 .4%) Financial derivatives 5,594 - - - 379 86 Investments in equity securities 256,443 850 218,818 - - F-191 F-192 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 201931 DECEMBER 2019 Notes to the Separate Financial Statements (Continued) 23 Related Party Transactions (Continued) The following table disclose the changes in the numbers of GDRs attributable to the MLTIP between the beginning of the pro- gram and the end of the reporting period: Other related parties in the tables above are represented by entities which are under control of the Company's ultimate con- trolling party Oleg Tinkov . The income and expense items with related parties were as follows: In millions of RR Interest income calculated using the effective interest rate method Interest expense calculated using the effective interest rate method Enhanced exclusivity agreement expense Credit loss allowance for loans Dividend income Net gains/(losses) from foreign exchange translation Net gains from operations with foreign currencies Net (losses)/gains from derivatives revaluation Other comprehensive income: 2019 2018 Subsidiaries Other related parties Subsidiaries Other related parties 228 - 78 - (622) (110) (1,265) - - 17,158 (94) 111 (678) - - - 403 - - - - (19) 1,351 68 195 538 10,148 (139) (208) - - (619) - - - Revaluation of investments in subsidiaries 37,362 In thousands Granted during the year Vested during the year At 31 December 2016 Granted during the year Vested during the year Forfeited during the year At 31 December 2017 Granted during the year Vested during the year Forfeited during the year At 31 December 2018 Granted during the year Vested during the year Forfeited during the year At 31 December 2019 Number of GDRs attributable to the MLTIP 7,425 (464) 6,961 2,270 (1,326) (60) 7,845 154 (1,805) (16) 6,178 91 (2,419) (68) 3,782 In 2019 the total remuneration of Directors listed in the Management Report amounted to RR 17,3 million (2018: RR 17,6 million) . Management long-term incentive program. On 31 March 2016 the Company introduced a MLTIP as both a long-term incen- tive and a retention tool for the management of the Company . On 15 January 2019 the Company granted GDRs to new participants in MLTIP which resulted the total number of GDRs attrib- utable to the Management of 9,940 thousand as at 31 December 2019 (31 December 2018: 9,849 thousand) . Participants of the program receive the vested parts of their grants provided that they are employed by the Group during the vesting period . Participants are entitled to the dividends, if any . Participants who leave the Group lose their right for the unvested parts of the grants . The fair value of the awards as at grant dates (31 March 2016, 8 February 2017, 22 February 2018 and 15 January 2019) is determined on the basis of market quotes of GDRs as at those dates . Each grant is divided into 4 equal awards, each award is vested during 4 years in delivered equal tranches . The delivery dates as of which the GDRs are allowed to be sold by the participants correspond to the vesting dates at 14 April 2016 and each subsequent 31 March (with exception of 2019 when the vesting date for all participants was 31 January 2019) until 2022 for participants joining in 2016, until 2023 for participants joining in 2017, then until 2024 for participants joining in 2018, and until 2025 for participants joining in 2019 . 24 Events after the End of the Reporting Period In February 2020 the Company announced plans to invest in a new venture project to set up a fintech company providing a range of services to retail customers in Europe (excluding CIS) . The startup will offer non-credit financial products . The project is due to launch in 2020, with the Company as its key seed investor . The Company will have a controlling interest in the new venture . The Company's initial commitment is up to Euro 25 million and will be contributed in tranches as the venture develops . On 10 March 2020 the Board of Directors declared an interim dividend in line with the current dividend policy of USD 0 .21 per share/per GDR with a total amount allocated for dividend payment of around USD 41 .9 million . On 19 March 2020 Altoville Holdings Limited and Nemorenti Limited (companies under control of Mr . Oleg Tinkov) transferred all of the Company’s Class B shares owned by them to two Tinkov family trusts . Mr . Oleg Tinkov remains the ultimate bene- ficiary of his holding, and thus his voting rights are unaffected by this change . This change also has no consequences for or impact on the operations of the Company and its subsidiaries . The quoted market price of the Company’s GDRs (Moscow Exchange) has decreased by approximately 41% at the date of ap- proval of these separate financial statements as compared to the end of 2019 . The market price of the GDRs directly impacts the carrying value of investments in subsidiaries in the Company’s separate financial statements . F-193 F-194 STRATEGIC REVIEWDIRECTORS’ REVIEWFINANCIALSTCS GROUP HOLDING PLCANNUAL REPORT 2019GLOSSARY Active Users Artificial Intelligence Anti-money laundering Average cost of funding Average interest rate on loans Capital adequacy ratio CBRF Charge-off rate Charge-offs Class A share Class B share AU АI AML n/a n/a CAR CBRF n/a n/a n/a n/a Compound Annnual Growth Rate CAGR Compulsory car insurance programme OSAGO Corporate social responsibility Cost of borrowing Cost of risk Cost to income ratio Cost to income ratio (excl . acquisition costs) Country by Country Reporting CRM Cyprus Securities and Exchange Commission Days past due Financial Conduct Authority GIBDD Global depositary receipt Gross portfolio yield Interest-earning assets Interest-earning liabilities International financial reporting standards IPO KASKO CSR n/a n/a C/I n/a CbCR n/a CySec dpd FCA GIBDD GDR n/a IEA IEL IFRS n/a A performance metric for the success of an internet product commonly assessed per month (MAU), per week (WAU), or per day (DAU) n/a Laws regulating money laundering and terrorist financing Interest expense / Average IEL Core revenue on loans / Average net loan portfolio Capital/RWA Central Bank of the Russian Federation Loan charge-off / Average gross loans Loans written off the balance One share in TCSGH PLC having one vote One share in TCSGH PLC having ten votes n/a n/a n/a Interest expense/interest bearing liabilities Loan loss provision / Average gross loans Operating and acquisition expense / Core revenue Operating expense / Core revenue Online customer relationship management system Cyprus regulator of financial markets n/a UK regulator of financial markets Law enforcement agency responsible for traffic One TCS Group Holding PLC GDR represents an interest in one class A share Core revenue on loans /Average gross loan portfolio Gross loans + interbank loans and accounts + securities + interest earning cash equivalents Deposits + interbank + debt securities + subordinated loans + syndicated loan n/a Initial public offering, in the case of TCSGH plc with listing on the London Stock Exchange in October 2013 Key performance indicators Loan loss provision London Stock Exchange M&A KPI LLP LSE - n/a Allowance for bad loans n/a Mergers and acquisitions activity, consolidation of compa- nies Management report/consolidated management report MR/CMR Mobile virtual network operator MVNO n/a n/a N1 .0 Net charge-offs Net interest margin Net Promoter Score NFC N1 .0 n/a NIM NPS NFC Russian statutory capital adequacy ratio Loan charge-offs less recoveries Net interest income / Average IEA n/a Near Field Communication Non-financial statement/consolidated non-financial statement NFS/CFNS n/a Non-performing loans NPV Person discharging managerial responsibilities NPLs NPV PDMR PIE POS Revenue Return on average assets Return on average equity Risk-adjusted net interest margin Risk-weighted assets Russian accounting standards Smart Couriers SMEs The Group’s management long term incentive plan Public interest entity Point-of-Sale loans n/a ROAA ROAE Risk-adjusted NIM RWA RAS n/a n/a MLTIP Loans 90+ days overdue Net present value n/a n/a Credit offering at merchant and retail points of sale Operating income Net income / Average assets Net income / Average equity (Net interest income - PL provisions) / Average IEA Assets weighted by risk as per the CBRF methodology n/a The Group’s courier network, completing KYC and delivering cards to customers Small and medium enterprises n/a Treasury portfolio n/a Investment securities and repos KASKO Voluntary car insurance programme G-1 G-2 TCS GROUP HOLDING PLCANNUAL REPORT 2019 INVESTOR INFORMATION Detailed below are contacts and various addresses investors may find useful. More up to date investor information, including the Group’s current and historic share prices, corporate news, latest operational and financial results, presentations and other updates, is available on the TCS Group corporate websites at www .tinkoff .ru/eng More up to date information can be found at the TCS Group Holding corporate website at www .tcsgh .com .cy and www .tinkoff .ru/eng Company Secretary Caelion Secretarial Limited (registered number HE351260) 4th floor Berengaria 25 Spyrou Araouzou 25 Limassol 3036 Cyprus Telephone: +357 2504 0404 Fax: +357 2504 0415 TCS Group Holding PLC (registered number HE107963) Telephone: +357 2505 0668 Email: administration@tcsgh .com .cy Registered office address: 5th floor Berengaria 25 Spyrou Araouzou 25 Limassol 3036 Cyprus Mail to: PO Box 56356, 3306 Limassol . Principal business premises: Office 403, Lophitis Business Centre Corner of 28th October/Emiliou Chourmouziou Streets Limassol 3035 Cyprus Telephone: +357 25 35 88 35 administration@tcsgh .com .cy Larisa Chernysheva, Head of Investor Relations ir@tcsgh .com .cy ir@tinkoff .ru stakeholderengagement@tcsgh .com .cy Artem Lebedev, Head of PR pr@tcsgh .com .cy pr@tinkoff .ru Depositary Existing investors are encouraged in the first instance to speak to their brokers/custodians, and then direct queries and questions through the Depositary’s contacts page on adr .com https://adr .com/contact/jpmorgan Custodian HSBC Bank plc (acting by way of its Athens branch) HSBC Bank plc (Greece) via its department HSBC Securities Services, Greece 109–111, Messoghion Ave . 115 26 Athens Greece Auditors PricewaterhouseCoopers Limited City House, 6 Karaiskakis Street CY-3032 Limassol Cyprus G-3 TCS GROUP HOLDING PLCANNUAL REPORT 2019

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