GarantiBank International: Annual Report 2021

Transcription

1. 1 ANNUAL REPORT 2021 GARANTIBANK INTERNATIONAL N .V.
2. Annual Report 2021 GARANTIBANK INTERNATIONAL N .V. 2 3
3. Contents 07   Who We Are 15  Report of the   Managing Board 4 29   5 Corporate Governance 35  Report of the   Supervisory Board 43  Contact Information 45  Financial Statements 137 Other Information
4. Who We Are GBI is a wholly-owned subsidiary of Garanti BBVA and a member of BBVA GROUP 6 08   Key Figures 09  About Us 10  Purpose & Values 11  Supervisory Board 12  Managing Board 13  Senior Management Team 7
5. W H O W E A RE WHO WE A RE Key Figures EUR 1 ,000 2021 2020 2019 2018 2017 4,129,876 3,430,176 3,615,038 4,288,512 4,274,149 Cash and balances with central banks 675,396 524,911 721,128 836,208 339,431 Loans and advances to banks 620,651 654,246 325,733 324,599 383,104 2,535,213 2,092,514 2,433,408 2,847,874 3,048,906 Financial assets at fair value through other comprehensive income 250,198 102,773 75,114 206,040 438,500 Deposits from banks 409,982 344,614 194,917 803,199 663,792 3,037,822 2,444,457 2,731,363 2,801,236 2,903,080 619,765 600,875 591,995 582,562 594,699 Total income 69,635 56,306 61,015 75,439 87,928 Profit for the year 18,011 6,803 6,612 12,020 26,234 Total assets Loans and advances to customers Deposits from customers Equity 8 About Us RATIOS Common Equity Tier 1 ratio % 21.69 23.84 23.89 21.27 20.44 Total capital ratio % 21.83 23.88 26.42 23.58 22.74 LCR - Liquidity coverage ratio % 516.9 509.3 769.9 583.3 359.9 58 72 71 62 51 Return on average equity % 2 3.00 1.15 1.13 2.10 4.53 Non-performing loans % 3 0.93 1.02 2.78 3.14 1.93 Cost of Risk % 4 0.20 0.30 0.32 0.43 0.28 Return on average assets % 0.48 0.19 0.18 0.29 0.58 224 240 244 251 242 3 3 3 3 3 Cost to income ratio % 1 GBI is a wholly-owned subsidiary of Garanti BBVA and a member of BBVA Group. GarantiBank International N.V. (“Garanti BBVA International” or “GBI”) is a mid-sized European bank established in Amsterdam, the Netherlands in 1990, with a branch in Germany. GBI serves corporate, institutional and retail clientele, offering financial solutions in the areas of trade and commodity finance, corporate banking, global markets and retail banking. GBI is a wholly-owned subsidiary of Turkiye Garanti Bankasi A.S. (Garanti BBVA). Our ultimate parent is Banco Bilbao Vizcaya Argentaria S.A. (BBVA). GBI operates in accordance with the Dutch and European Union laws and regulations, and is under the supervision of the European Central Bank (ECB), De Nederlandsche Bank (DNB) and De Autoriteit Financiële Markten (AFM). STAFF & NETWORK Total average number of employees Foreign branches & representative offices 1 — Cost-to-income ratio is calculated using total expenses and total income. Expected credit losses are excluded. 2 — Return on average equity is calculated using average shareholders’ equity, excluding result after tax. 3 — Credit impaired loans to customers / Gross loans to customers 4 — Expected credit losses on financial instruments / Average gross amounts of loans and advances to customers G A R A N T I B B V A I N T E R N AT I O N A L — A N N U A L R E P O R T 2 0 2 1 G A R A N T I B B V A I N T E R N AT I O N A L — A N N U A L R E P O R T 2 0 2 1 9
6. W H O W E A RE Purpose & Values OUR PURPOSE TO BRING THE AGE OF OPPORTUNITY TO EVERYONE WHO WE A RE Supervisory Board Mr. Recep Baştuğ Chairman Member of the Remuneration Committee Mr. Baştuğ graduated from Çukurova University’s Faculty of Economics. He started his career in Garanti BBVA’s Internal Audit Department in 1989. Mr. Baştuğ worked as a Corporate Branch Manager from 1995 to 1999; a Commercial Regional Manager from 1999 to 2004; a Commercial Banking Coordinator from 2004 to 2012; and served as an Executive Vice President of Commercial Banking and Consumer Finance from 2013 to 2018. Following a brief period as a Vice Chairman at a private company he was appointed as the Board Member, President & CEO at Garanti BBVA on 1 September 2019. Mr. Baştuğ has 30 years of experience in banking and business administration. Mr. Aydın Düren OUR VALUES 10 CUSTOMER COMES FIRST We Are Empathetic We Have Integrity We Meet Their Needs WE THINK BIG We Are Ambitious We Break The Mold We Amaze Our Customers Chairman of Audit and Compliance Committee Member of Risk Committee After serving as an associate, partner and managing partner for over 18 years at international private law firms in New York, London and Istanbul, Mr. Düren joined Garanti BBVA in 2009 as the Executive Vice President in charge of Legal Services. With 23 years of experience in banking and business administration, as a Board Member at Garanti BBVA, his current responsibility areas include Legal Advisory Services, Legal Collections, Litigation, Garanti Payment Systems, Legal Services, Wholesale Recovery and Retail Collections. Furthermore, Mr. Düren is the Vice Chairman of Garanti Bank Pension and Provident Fund Foundation, Garanti Bank International N.V. and Board Member of Garanti Payment Systems, Teachers Academy Foundation and Garanti BBVA Mortgage. Since June 2015, Mr. Düren has also served as the Corporate Secretary of Garanti BBVA. Mr. René van der Linden WE ARE ONE TEAM We Are Committed We Collaborate This Is Our Bank G A R A N T I B B V A I N T E R N AT I O N A L — A N N U A L R E P O R T 2 0 2 1 Chairman of Remuneration Committee Member of the Supervisory Board of Eureko Sigorta; Member of the Supervisory Board of Ballast Nedam; Advisor of Otto Workforce; Member of the Dutch Parliament between 1977 and 1998 and Secretary of State for Foreign Affairs between 1986 and 1988; Member of the Benelux Parliament and of the Assembly of the Western European Union (WEU) and Vice President of the WEU from 1999 to 2004; Chairman of the European People’s Party (EPP) in the Council of Europe from 1999 to 2004; President of the Parliamentary Assembly of the Council of Europe from 2005 to 2008; Member of the Senate of the Netherlands from 1999 to 2015; President of the Dutch Senate from 2009 to 2011. Mr. Harry de Roo Chairman of Risk Committee Board Treasurer of Stichting Nationaal Warmtefonds since 2013; Board member of Stichting Agri3; Non-executive member of the board and various committees of Rabobank Pensioenfonds from 2017 until feb 2022; Board member and Chairman Audit and Risk Committee at the International Maize and Wheat Improvement Center (CIMMYT) between 2016 and 2021; Non-executive member of the board and various committees at Banco Terra SA between 2013 and 2017; Advisor to Executive Board Rabobank between 2013 and 2014; CFRO/ managing board member at Rabobank International and board member of several nationally supervised retail bank subsidiaries - including the USA, Ireland and Poland of Rabobank International between 2006 and 2013; managing board member at Rabobank International between 2004 and 2006; CFO of Domestic Banking Activities at Rabobank Group between 2000 and 2004. Ms. Mirjam Halverhout Member of Audit and Compliance Committee (as of July 2021) Since 2017 member of the management team of Projective Biz and ProjectiveGroup, a European consultancy firm in financial services. Since 2018 member of the supervisory board and remuneration committee of Stichting Bureau Krediet Registratie (BKR), a Dutch credit registration agency. Between 2011 and 2016 board member of Solid Mortgages B.V. Between 2005 and 2009 CEO of Direktbank N.V. and furthermore over 20 years of management and board experience at Rabobank in corporate and retail banking. Mr. Bart Meesters Member of Audit and Compliance Committee (until July 2021) Dutch qualified lawyer and partner at Loeff Claeys Verbeke/Allen & Overy from 1988 to 2010; Off-Counsel of Allen & Overy and independent lawyer from 2010 to 2015; Member of the Supervisory Board at Stichting Orkater between 2011 and 2019. G A R A N T I B B V A I N T E R N AT I O N A L — A N N U A L R E P O R T 2 0 2 1 11
7. W H O W E A RE WHO WE A RE Managing Board Senior Management Team TRADE & COMMODITY FINANCE Mr. Erhan Zeyneloğlu Chief Executive Officer Mr. Zeyneloğlu began his career at Türkiye Garanti Bankası A.Ş. (Garanti BBVA) in Turkey. He joined GBI in 1995. Before his appointment as CEO, Mr. Zeyneloğlu held several managerial positions in various departments. In his most recent role, he served as the Executive Director responsible for Structured Finance and Retail Banking. Mr. Zeyneloğlu holds a Bachelor of Arts degree in Economics from Boğaziçi University. Mr. Marco Witteveen Chief Operating Officer Mr. Witteveen’s professional life began in 1985. He has since enjoyed a 35-year banking career. Twelve of these years involved expatriate assignments in Jakarta, London, New York and Geneva. During this time, he has held various managerial positions in several Dutch banks. Mr. Witteveen joined GBI in 2016 as the Chief Operating Officer responsible for technology and operations. He is a Business Economics graduate of Vrije Universiteit Amsterdam. Mr. Ali Arolat Executive Director CORPORATE BANKING Mr. Osman Barutçu Executive Director STRATEGY, SECURITY & CONTROL Mr. Alex Hurkmans Chief Digital Officer DUSSELDORF BRANCH Mr. Nevzat Işık Executive Director 12 13 TALENT & CULTURE Dr. Övünç Şişman Chief Financial Officer Dr. Şişman began his career in 1999. Before joining GBI in 2003, he held risk management positions at Garanti. Before joining GBI’s Managing Board, he was the Executive Director of Risk Management, Control and Reporting. Dr. Şişman holds a Management Engineering degree from Istanbul Technical University, a Master of Arts degree in Money and Capital Markets and Financial Institutions and a PhD in Economics from Istanbul University. Mr. Cem Bahadır Mutlu Chief Risk Officer Mr. Mutlu joined GBI in June 2017 as the Executive Director of Credits. In January 2018, Mr. Mutlu was appointed as a member of the Managing Board. During his 28-year banking career, Mr. Mutlu has held various positions in several Turkish banks. He holds a BA degree in Economics from Ankara University’s Faculty of Political Sciences. G A R A N T I B B V A I N T E R N AT I O N A L — A N N U A L R E P O R T 2 0 2 1 Ms. Mijke van Tilburg-van Alfen Director COMPLIANCE Mr. Tahsin Ertan Chief Compliance Officer INTERNAL AUDIT Mr. Cenk Taşpınar Chief Audit Executive G A R A N T I B B V A I N T E R N AT I O N A L — A N N U A L R E P O R T 2 0 2 1
8. Report of the Managing Board GBI has improved its financial performance in 2021 14 16   Economic Developments 18  Financial Analysis 20  Bussiness Strategy &   Development 25  Digital Transformation 26  Outlook 2022 15
9. R EP ORT O F T H E M A N AG I N G B OA RD REPORT OF THE MA NAGING B OA RD Economic Developments Global economic recovery remained strong yet heterogenous across countries and sectors throughout 2021 . Robust monetary and fiscal policy responses, coupled with high vaccine rollout numbers enabled major developed economies to largely offset the impacts of the pandemic on output and employment figures. On the other hand, growth in emerging markets (ex-China) and developing nations has been soft, owing to a number of factors including increased case count due to low vaccination and sporadic occurrence of new variants, and diminishing monetary support in response to rising global inflation. Improved pandemic outlook and reduced social distancing measures resulted in a partial release of the pent-up demand. Global manufacturing activity gained substantial momentum, despite supply side disruptions caused by swift changes in the magnitude and composition of demand, labor market shortages due to lockdowns in some regions and increasing commodity and transportation prices. Services remained firm albeit softer overall in comparison to manufacturing activity, as pandemic measures proved to be a larger setback, especially for tourism. In the light of these developments, the global economy is set to grow at 6.1% in 2021, and 4.4% in 2022. As the flagship of global growth, the US economic output is expected to rise by 5.6%, and 4.2% respectively. The Eurozone, on the other hand, is expected to grow steadily at 5.1% and 3.7% respectively. 16 Release of pent-up demand and supply side bottlenecks, as well as rising commodity prices and ample monetary stimulus fuelled global inflation in 2021. The US inflation printed 7.0% y/y in 2021, the highest in over three decades. Similarly, Eurozone inflation is set to rise 5.0% y/y. Still, the global inflation trend is expected to fade over the coming years, as most of the factors contributing to its rise are deemed transitory. The US and Eurozone inflation figures are expected to average 4.8% and 3.0% respectively in 2022. In 2021, the global monetary and fiscal stance remained very accommodative, so as to dampen the continued effects of the pandemic on the economy. The Federal Reserve kept its interest rate target range at 0.00% - 0.25% throughout the year. Asset purchases continued at a total pace of USD 120 bn per month for most of the year, until it was decreased to 40 bn per month in November. Subsequently, total assets of the Federal Reserve amounted to US 8.8 trn as of 2021, growing 19% y/y. On the fiscal front, the American Rescue Plan Act enacted early in 2021 added an extra USD 1.9 trn (circa 9% of GDP) to the fiscal stimulus envelope. In Europe, the ECB interest rates were unchanged, while continuing asset purchases under APP and PEPP took the ECB balance sheet to EUR 8.6 trn (+23% y/y). end of the EUR 1.85 trn PEPP envelope in March, while mildly boosting purchases in the standing APP program to avoid cliff effects. The additional interest rate incentive for the TLTRO III is also set to end in June 2022. While the ECB members committed to action should inflationary pressures diverge from forecasts, current price dynamics are still seen as transitory and core inflation is expected to undershoot the ECB’s target in the medium term. Meanwhile, the impact of the omicron variant, though less disruptive, remains a downside risk to the recovery outlook, as some members of the monetary union welcome the year under lockdowns. Emerging markets (ex-China) saw substantial outflows as recovery lagged. Several EM central banks resorted to rate hikes due to inflationary pressures in 2021. The trend is expected to continue, with global economic backdrop causing potentially more headwinds in 2022. Still, swifter global recovery from the virus with increased vaccine rollout and faster convergence to normalcy poses upside risks for these economies. In the wake of soaring inflation and with postpandemic recovery in sight for developed markets, financial conditions are expected to tighten in 2022. The Federal Reserve, which already began tapering its asset purchases in November 2021, is set to end the latter by the first quarter of the year. Median staff projections imply three rate hikes for both 2022 and 2023. In Europe, the ECB announced the In 2021, the global monetary and fiscal stance remained very accommodative, so as to dampen the continued effects of the pandemic on the economy. G A R A N T I B B V A I N T E R N AT I O N A L — A N N U A L R E P O R T 2 0 2 1 G A R A N T I B B V A I N T E R N AT I O N A L — A N N U A L R E P O R T 2 0 2 1 17
10. R EP ORT O F T H E M A N AG I N G B OA RD REPORT OF THE MA NAGING B OA RD Financial Analysis It has been another challenging year in 2021 , marked by the strong impact of the COVID-19 pandemic, with severe health and economic consequences. In this context, and as part of BBVA Group, our priorities have remained clear and unchanged: protecting the health of our employees, clients and society as a whole, providing an essential service to the economy, and financial support to individuals and businesses, while focusing on growth in the second half of the year. GBI HAS IMPROVED ITS FINANCIAL PERFORMANCE IN 2021 18 Despite a challenging operating environment, GBI has demonstrated the strength of its business model, and has reported solid financial results, with total income growing at double digit. Our solid capital and liquidity position has supported us throughout 2021. In line with the strong risk metrics as well as the improving financial performance Moody’s upgraded GBI's deposit rating to Baa3 from Ba1, reflecting the achieved de-risking of GBI's credit profile and closer alignment to the strategic priorities as set by its ultimate parent BBVA, and the reduced potential for transmission of risks to GBI from its exposure to counterparties in emerging economies. GBI has delivered a strong profit before tax, which increased by 160 percent versus last year. A strong income generation led to an improvement in cost to income ratio to 58.25 percent from 72.24 percent. Thanks to our selective approach and sound credit risk practices, the cost of risk has decreased to 20 bps compared to 30 bps of 2020 and NPL ratio has decreased to 0.93 percent from 1.02 percent in 2020. Finally, we have maintained our strong capitalization, with a CET1 capital ratio of 21.69 percent (2020: 23.84 percent). ASSET GENERATION INCREASED IN 2021 WHILE THE ASSET QUALITY HAS CONTINUED TO IMPROVE GBI has continued its sound approach to its credit policy in 2021, where the global economic recovery has been observed coupled with heterogenous sectoral performance. In this challenging operating environment GBI has been able to increase its total assets to EUR 4.1 billion from the level of EUR 3.4 billion at the end of 2020. The main driver of growth has been the increase in “Loans and Advances to Customers” by EUR 443 million, in line with the GBI’s risk transitioning as per the risk policies in place, by continuous reduction to loans to customers residing in Turkey and decrease in loans to customers operating in economic sectors that have a higher risk profile. The growth has been funded by stable funding resources through the increase in “Deposits from Customers” by EUR 593 million. “Loans to Banks” has slightly decreased by EUR 34 million, despite an increase in client-driven trade finance exposures by 14 percent. The decrease in “Loans to Banks” is mostly driven by significant decrease in reverse repo transactions by EUR 132 million. Instead of using collaterals through reverse repo transaction, the “Marketable Securities” portfolio held in FVOCI has been increased by EUR 147 million, through new purchases made in line with the guidelines of the Group ALM Investment Policy. “Deposits from Banks” has increased by EUR 65 million, mostly as a result of the additional use of the TLTRO facility from ECB, while market-based funding from other financial institutions has been decreased, in an effort to optimize funding cost. As a result of all these actions, “Cash and Balances with Central Banks” has increased by EUR 150 million to EUR 675 million (or 16.4 percent of the balance sheet), providing a strong liquidity position. GBI’s asset quality has remained strong during 2021. Despite a slight increase in Stage 3 loans to EUR 23.7 million (2020: EUR 21.5 million) in 2021, the Bank has managed to reduce its NPL ratio to 0.93 percent Moody’s upgraded GBI's deposit rating to Baa3 G A R A N T I B B V A I N T E R N AT I O N A L — A N N U A L R E P O R T 2 0 2 1 (2020: 1.02 percent). ECL allowance has increased by EUR 3.4 million, from EUR 27.7 million in 2020 to EUR 31.1 million in 2021 in line with the increase in the business volumes. GBI has preserved its prudent approach and increased the ECL allowance for loans and advances to corporates and banks by EUR 3.6 million in 2021. “Contingent Liabilities” has decreased by EUR 139 million to EUR 420 million (2020: EUR 559 million) partly as a result of a decrease in commitments in loan granting by 44 percent, as well as a temporary decrease in the letters of credit at the year-end. “The Profit for the Year” stands at EUR 18.0 million in 2021, which is an increase of 164.7 percent compared to 2020 (EUR 6.8 million). This strong improvement in profitability has been achieved through a combination of improvement in all operational areas, but mainly driven by increase in total income as well as stable operating expenses and lower cost of risk. As a result, GBI has improved its return on average equity (ROE) to 3.00 percent in 2021 (2020: 1.15 percent). “Total Income” amounted to EUR 69.6 million, which is 23.7 percent higher than in 2020 (EUR 56.3 million). This increase in is mainly explained by the surge in commission income as a result of increase in trade finance volume as well as the improvement in “Net Interest Income” due to the growth in loans to banks and customers. Another important factor was the decrease in cost of funding. GBI has continued to decrease the interest expense on deposits from customers by 37.4 percent, despite an increase in deposits by 24.3 percent., As a result NII has increased to EUR 53.1 million in 2021 (2020: EUR 46.9 million. Consequently, the Net Interest Margin (NIM) has improved to 1.41 percent (2020: 1.33 percent). The net commission income has increased from EUR 10.9 million in 2020 to EUR 17.4 million in 2021, due to higher commissions trade finance commissions reaching EUR 13.3 million (2020: 7.0 million) related to increased transactional volume. Trading gains have also improved by EUR 0.6 million in 2021 to EUR 2.5 million (2020: EUR 1.9 million). Other income and expenses, which are mostly driven by the contributions to the deposit guarantee fund and national resolution fund has almost stayed at the same level of EUR 3.3 million in 2021 (2020: EUR 3.4 million). Total operating expenses stabilized at EUR 40.6 (2020: EUR 40.7 million). GBI continued to decrease its personnel expenses to EUR 26.3 million in 2021 (2020: EUR 26.8 million) whereas observed a modest increase in other operating expenses and depreciations in intangibles as a result of ongoing digitalization initiatives. Change in allowances for expected credit losses led to a loss of EUR 4.7 million in 2021 (2020 EUR 6.2 million). This is mainly driven by the increase in the provisions on Stage 1 and Stage 2 assets due to the growth in loans and advances to customers and banks. GBI has continued to be cautious in the calibration of collective ECL models to reflect the potential aftermath effects of the global COVID-19 pandemic, as well as in the individually assessed loans. Income tax expense is EUR 6.4 million for 2021 (2020: EUR 2.6 million) with an effective tax rate of 26.1 percent (2020: 28.0 percent) similar to last year. Despite a challenging operating environment, GBI has demonstrated the strength of its business model, and has reported solid financial results, with total income growing at double digit. G A R A N T I B B V A I N T E R N AT I O N A L — A N N U A L R E P O R T 2 0 2 1 19
11. R EP ORT O F T H E M A N AG I N G B OA RD REPORT OF THE MA NAGING B OA RD Business Strategy & Developments There were challenges in 2021, marked by the impact of the pandemic, with severe health and economic consequences. In this context, our priorities have remained clear and unchanged: protecting the health of our employees, clients and society as a whole, providing an essential service to the economy, and financial support to individuals and businesses. GBI continued to focus on its strategic priorities in 2021, where the human talent and the customer focus have been the main strengths. The pandemic we are facing has accelerated trends on which our strategy is based, such as digitization. Our commitment in digitalization is paying off and has given us an advantage that has allowed us to better serve our customers, even in a context as complex as the present, and largely operating remotely. 20 Working with a high quality and engaged team, we have been able to tackle the challenges and also take advantage of the opportunities that this new environment affords us. We would like to take this opportunity to praise the efforts of our employees for their constant dedication, their continuous effort and their contribution to these results in a particularly difficult year for everyone. It is thanks to each one of these individuals that we are able to work as one team. At GBI we will continue to work to achieve more sustainable and inclusive development. WE PROVIDE SIMPLE YET CUSTOMIZED SOLUTIONS IN A COMPLEX REGULATORY AND MACROECONOMIC ENVIRONMENT BUSINESS LINES GBI is a mid-sized European bank, with a branch in Germany. We primarily serve retail, corporate, institutional and high-net-worth clientele. We strive to create an appealing and unique client experience to achieve mutual benefit and client loyalty. GBI has been positioned as a savings bank both in the Netherlands and Germany for almost three decades. We serve over 70,000 clients in these markets. Euro-denominated savings deposits by our retail clients has been a major funding source for GBI as a key component of its strategy. Our personal approach, reliability, stability and sound balance sheet, provide comfort and value to our stakeholders. We provide simple yet customized solutions in a complex regulatory and macroeconomic environment. Our digital capabilities and aspirations which are firmly supported by our parent, Garanti BBVA and by our ultimate parent BBVA, aim to enhance the value that we create for our clients and counterparties. GBI continued to focus on its strategic priorities in 2021, where the human talent and the customer focus have been the main strengths. G A R A N T I B B V A I N T E R N AT I O N A L — A N N U A L R E P O R T 2 0 2 1 RETAIL BANKING We offer simple savings products through digital and offline channels. Our dedicated retail banking teams deliver a unique customer experience through our own native-speaking and personable call centers in the Netherlands and Germany, which differentiates us and bolsters client loyalty. Our customer satisfaction survey and donation program in cooperation with Make-A-Wish Foundation started in 2018 and it repeats yearly. This feedback mechanism helps us constantly improve on our customer experience and contributes to our corporate social responsibility projects. The improvements in our digital channels were appreciated by our customers based on their feedback. Both our retail websites in the Netherlands and Germany, redesigned with a new look and feel, and mobile functionality were launched in 2021. Since Q4-2020, our Dutch SME and German individual savings clients are using our new digital customer portal. With this new portal, we offer various functionalities with a contemporary design. One-click fund transfer, client data maintenance, opening/closing accounts and deposits, direct messaging, and widget structure for personalized experience are some of the functionalities offered to our clients with a stateof-the-art technical infrastructure. Dutch individual savings clients will be migrated to the new digital portal in the course of 2022. Furthermore, we plan to enhance the digital experience of our customers starting from onboarding to complete customer life cycle. As part of our continuous improvements, we will be focusing on the improvements in instant verification solution and, dialogue management solution to deliver an aggregate and instant communication experience. As a final note, both in the Netherlands and Germany, we were able to serve our customers as usual and deliver the same quality service during the pandemic despite the negative impact of COVID-19, thanks to our technological infrastructure and fast adaptation to remote working, without posing any risk to our employees. Our customers were able to reach us immediately and we took care of their requests without any disruption. TRADE & COMMODITY FINANCE International trade and financing of commodities and merchandise can be challenging and complex. Geopolitical events, global supply and demand imbalances, regulatory and jurisdictional variations, commodity and currency price fluctuations, natural disasters and weather conditions constantly test the sustainability and resilience of global trade and its actors. Since GBI’s inception in 1990, we have served corporations functioning as international merchants and supply chain managers, physically trading various commodities and corporations that produce, store, import, export and distribute commodities and other merchandise as part of the global supply chain. Our clients take an active role in the international physical trade of metals, agricultural products and energy commodities with trade flows spanning across Europe, the Middle East, Africa, the Americas and Asia. Trade & Commodity Finance delivers traditional products such as transactional trade finance facilities with or without self-liquidating structures, hedging and margin-call financing, syndicated facilities, Schuldschein lending, documentary credits and collections. In the context of crossselling and holistic client coverage, we also offer correspondent banking solutions, trade-receivables factoring, hedging and cash management services. With such a vast array of banking and trade finance products, we continuously strive to deliver the best value and risk coverage to our clientele with fast and seamless execution. Consequently, our clients enjoy simple solutions and smooth handling while we deal with any challenges and complexities in the background. G A R A N T I B B V A I N T E R N AT I O N A L — A N N U A L R E P O R T 2 0 2 1 21
12. R EP ORT O F T H E M A N AG I N G B OA RD Following a successful 2020 where , despite the pervasive impact of COVID-19, we managed to benefit from the retrenchment of several large banks from the Trade & Commodity Finance market, we further built our platform to take advantage of strong demand from Asia and other parts of the world against a backdrop of rising commodity prices. This effort paid out throughout 2021; total trade finance volumes rose significantly, thanks to growth of commodity finance loans and the growth of documentary credits supporting our clients’ cross border trade activities. As a result, we benefited from increasing profitability where commissions earned on documentary credits increased by 90%. Loans to customers and banks grew while maintaining solid asset quality again no impairments. Our aim remains to selectively chase opportunities that fit our scale and risk appetite, while also taking advantage of synergies with other BBVA entities. CORPORATE BANKING 22 Under our Corporate Banking coverage, we serve a select set of corporate clienteles with international operations, which are predominantly based in the Netherlands, the rest of the European Union and Turkey with well-structured products, that can be categorized under transactional banking, including but not limited to; working capital loans, tradeloans, local currency lending, receivable finance and Islamic finance. To promote cross-selling, any of the aforementioned can be combined or used alongside cash management products, documentary credits, collections, correspondent banking arrangements or hedging products, to best serve the interest of our clients. In addition to delivering various services and lending products, we also attract deposits from our corporate clients. These are roughly equivalent to two-thirds of our retail banking funding, a substantial amount of which is mostly denominated in US dollars. Key success factors of our Corporate Banking offerings are clear communication and coordination, a personal approach, swift execution and embracing ownership of our clients’ challenges. In 2021, despite the volatile and challenging economic conditions, GBI Corporate Banking proved its resistance and flexibility in adjusting to the new environment and achieved a moderate loan growth. For the year ahead, we will continue our prudent strategy to further improve our tailor-made product offerings and client coverage in target markets. G A R A N T I B B V A I N T E R N AT I O N A L — A N N U A L R E P O R T 2 0 2 1 REPORT OF THE MA NAGING B OA RD FINANCIAL INSTITUTIONS GLOBAL MARKETS SALES GBI has had successful relationships and good cooperation with other reputable global and regional financial institutions since its inception in 1990. Our Global Markets Sales (GMS) department provides financial intermediary services to highnet-worth individuals and corporate clients. Our services are delivered to our clients in advisory and execution-only forms. We provide our clients access to global financial markets. Our advisory services are designed for clients who would like to receive guidance in their financial investments. We provide risk-based portfolio advice, and investment and risk management ideas to help our clients achieve capital preservation and steady portfolio growth. Our execution-only brokerage services are for the clients who seek market access through direct, fast and accurate order execution. The Financial Institutions and Investor Relations (FI&IR) department covers GBI’s correspondent banking relationships with other financial institutions (FIs) around the globe, which entails cooperation in a broad range of areas and products, including but not limited to transactional banking such as documentary credits, collections and cross-border payments as well as financial markets such as FX and derivatives transactions. In addition, FI&IR is active in origination and distribution of trade-related assets in the secondary markets. By establishing and maintaining necessary correspondent banking relationships with FIs, and securing crucial credit limits with them, FI&IR also supports our Trade and Commodity Finance, Corporate Banking, ALM and Global Markets teams in terms of their related transactional needs. FI&IR is also responsible for managing GBI’s relations with the credit rating agencies and coordinating the external rating process of the bank. GLOBAL MARKETS Our Global Markets activity incorporates trading functions related to fixed income, rates and currencies. The Global Markets team provides market access for GBI’s Global Markets Sales activity, which in turn supports corporate and individual investor clientele and manages very limited positions in the cited financial markets. We are able to reach sizeable transaction volumes through our broad network of market counterparties. This ensures fast, accurate and competitive pricings for our customers in compliance with MiFID-II regulations. GBI aims to position itself as the home bank of core clients by providing a complete set of financial services through our GMS activity. Owing to GMS’s enhanced returns, coherent advisory and transparency in relationships, GBI enjoys high customer loyalty. Despite the volatility in global markets, GMS managed to deliver solid results in terms of assets under management increase in 2021. In 2022, with the ongoing digitalization of our processes and products, GMS aims to continue focusing on providing value to our clients as well as our stakeholders. ASSET, LIABILITY & CAPITAL MANAGEMENT GBI focuses on prudent balance sheet management with the aim to sustain adequate risk-adjusted return on capital, a sound funding structure and strong level of solvency and liquidity. We have an Asset and Liability Management (ALM) function, which acts as the central point and applies a funds transfer pricing mechanism, isolating front offices from market risks. These risks are translated into an institutional level to be strategically navigated by the Assets and Liabilities Committee (ALCO). Commissions earned on documentary credits increased by 90%. G A R A N T I B B V A I N T E R N AT I O N A L — A N N U A L R E P O R T 2 0 2 1 23
13. R EP ORT O F T H E M A N AG I N G B OA RD REPORT OF THE MA NAGING B OA RD Digital Transformation 24 GBI oversees the efficient capital allocation and the management of liquidity , interest rate and exchange rate risks through its Finance function, which analyses and reports on these risks and proposes alternative strategies to ALCO. (particularly in relation to Know Your Customer, Anti Money Laundering, Sanctions and Data Privacy), regulations, laws as well as the ethical and social norms that generally apply to our people and activities. GBI’s overall approach to capital management is intended to maintain sufficient capital to cover the (economic) risks at all levels and to ensure compliance with regulations. GBI’s Capital Management strategy is driven by our strategic aims and risk appetite. Our policy is to retain sufficient financial flexibility to implement GBI’s strategy in all market conditions. GBI’s Risk Appetite Statement forms the basis of the capital plan. The capital plan sets targets well above the minimum regulatory requirements. The Risk Appetite Statement and targets are developed and communicated to all affiliated businesses. Policies for recovery planning are a natural extension of GBI’s capital management policies. Within this context, and as a BBVA Group entity, GBI is subject to the Internal Liquidity Adequacy Assessment Process (ILAAP) and Internal Capital Adequacy Assessment Process (ICAAP) as stipulated by the European Central Bank to BBVA Group. In 2021, we have remained focused on enhancing our internal control environment on non-financial risks, ensuring compliance with applicable laws and regulations in the most effective manner. As always, special attention was given to the management of inherent risks related to Financial and Economic Crime (FEC) including integrity risks such as money laundering, corruption or evasion of sanctions regulations. RISK MANAGEMENT In our day-to-day business, GBI is exposed to multiple financial risks. These include liquidity and funding risks, interest rate risk, credit risk in our lending and banking transactions and market risk in our trading positions. Financial risk management at GBI is monitored and governed by an independent Risk Management function. The function primarily serves to correctly identify, measure and propose management actions for risks to the Credit Committee, ALCO, Risk Management Committee and the Supervisory Board in normal and stressed economic conditions and to oversee our business activities to ensure that they are consistent with GBI’s risk appetite. The overall amount of risk that GBI is willing to take is established in the Risk Appetite Framework. We monitor a range of risk metrics to ensure our risk profile is in line with our risk appetite. The Risk Appetite Statement, the Principles of Risk Appetite and the Limit Framework, all of which are approved by the Supervisory Board, are designed to withstand market volatility and stress, while meeting strategic goals and regulatory requirements. They combine various financial and non-financial risk disciplines into a single converged approach and provide businesses with a clear and fair view of their risks and the way these risks are managed. Covid-19 and all its variants continued to have a firm grip on the world in 2021 and the way organizations like GBI served their clients and collaborate. The dependency on a solid, robust and scalable digital operating model increased even more. Despite all consequences related to well-being of humankind, thanks to our digitalization initiative GBI’s value chains could still operate continuously and efficiently. Next to that, the progress achieved in 2021 substantially contributed to a robust, stable and more secure operating model. At first GBI accelerated in 2021 Business and IT alignment, supporting GBI Strategy, Security and Control with the goal to support and translate GBI’s strategy into innovation, accelerate continuous improvement and fully integrate all non-financial risk related activities within the value chains and domains. Second, the foundation for 2022 - 2023 was laid on with revised relationships with strategic vendors and platforms strengthening and supporting GBI’s ambition to continue and enhance using services from tech giants and existing and proven services in the market. This foundation will ensure that GBI is able to focus on what truly matters: customer experience and employee engagement. And third, GBI continued to deliver improvements in our value chains, and we are still very proud of all achievements realized last year where we expanded our services on our Internet Banking Platform, the renewal of our websites and realized internal efficiencies. 25 In 2021, GBI has also started a very important project in order to further enhance its Sustainability approach. With this project, GBI aims to define ESG as part of its strategy, establish a roadmap for the implementation of strategic initiatives, enhance accountability and improve its ICAAP by defining its risk appetite, performing materiality assessments and stress tests. Further disclosures on risk management are provided in the Risk Management section of the financial statements in this Annual Report. In addition to these financial risks, GBI is subject to non-financial risks in our daily operations. These pertain to IT and cybersecurity, operational processes, integrity risks, compliance to rules G A R A N T I B B V A I N T E R N AT I O N A L — A N N U A L R E P O R T 2 0 2 1 The progress achieved in 2021 substantially contributed to a robust, stable and more secure operating model. G A R A N T I B B V A I N T E R N AT I O N A L — A N N U A L R E P O R T 2 0 2 1
14. R EP ORT O F T H E M A N AG I N G B OA RD REPORT OF THE MA NAGING B OA RD Outlook 2022 Our strategic priorities in 2022 include improving the revenue stream through our core business lines Trade Finance , Corporate Banking and Global Markets Sales while enhancing our efficiency by cost control and further digitalization of operational flows and customer services. The economic recovery will continue in 2022, as uncertainties around inflation, supply chain tensions and new COVID-19 variants gradually clear up. The unprecedented changes we are witnessing around the world in terms of digitization and technological innovation and in terms of sustainability, especially decarbonization, will continue to play a key role. This affects all businesses and all sectors, in all countries. We believe these are big challenges ahead, but also great opportunities 26 Economic activity has been recovering faster than expected from the pandemic crisis The ongoing improvement is mostly related to the economic reopening supported by the vaccination process and the large fiscal and monetary stimulus, especially in G3 economies. After having fallen 3.2 percent in 2020 global GDP is expected to expand by 6.3 percent in 2021 and 4.7 percent in 2022. However, some negative supply shocks (such as bottlenecks in global value chains and higher energy prices) that have been holding economic activity down in recent months will likely continue to weigh on growth in 2022. In the US, Eurozone and China, GDP is expected to grow in 2022 at a relatively slower pace than 2021. There are now better growth prospects also for emerging countries, although the pre-crisis GDP levels will take longer to be achieved in most of them in a context of lagged vaccination as compared to advanced economies, less room for policy stimulus and higher commodity prices. Increasing inflation observed over the course of 2021 is likely to ease in 2022 as supply catches up with demand, bottlenecks fade and commodity prices lose steam. Overall, inflation is thus expected to remain broadly under control. Economic policies will keep focused on supporting the economic recovery, but higher inflation reduces their room for maneuver. The Fed is likely to carry out a gradual tapering during the first half of 2022, while starting its rate hikes. In Europe, the ECB is expected to scale down bond purchases (PEPP) and will likely redefine its key policy parameters in early 2022 regarding the interest rate path. Regarding fiscal policy, further stimulus is expected in the US. In Europe, the NGEU has been approved and could have a small short-run effect, but a significant impact in the long run. The process of withdrawal of monetary stimulus by the Fed is assumed to weigh on emerging markets assets and trigger earlier than expected hikes by local central banks. Our risk management approach will continue to sustain strong solvency, sufficient liquidity and low leverage to maintain our asset quality while targeting a cost-effective funding structure. Our strategic priorities in 2022 are: enhancing our Trade Finance franchise with an emphasis on creating synergies with the Group, focusing on serving our European-based clientele in Corporate Banking and moderately growing assets under management within our Global Markets Sales activities. We will continue with our stable funding strategy, which is aimed at preserving the retail franchise and diversifying our wholesale funding base. Digitalization of operational flows and customer services, and our ambition to work with the best and most engaged team will remain as the main pillars of our operating model. We believe these strategic priorities will result in ensuring a sustainable revenue stream and maintaining our high customer satisfaction level, while enabling a further reduction in controllable expenses and creating value for our stakeholders in a responsible manner. Our risk management approach will continue to sustain strong solvency, sufficient liquidity and low leverage to maintain our asset quality while targeting a cost-effective funding structure. G A R A N T I B B V A I N T E R N AT I O N A L — A N N U A L R E P O R T 2 0 2 1 G A R A N T I B B V A I N T E R N AT I O N A L — A N N U A L R E P O R T 2 0 2 1 27
15. Corporate Governance Effective corporate governance in accordance with high international standards is fundamental to GBI 28 29 30   Financial Reporting   Process 31  Managing Board   Composition 32  Supervisory Board 33  Future-Oriented Banking
16. CO RPO RAT E G OV E RN A N C E Financial Reporting Process As GBI is a wholly-owned subsidiary of Turkiye Garanti Bankasi A .S. (Garanti BBVA), which is in turn a consolidated subsidiary of Banco Bilbao Vizcaya Argentaria S.A. (BBVA), GBI’s policies and procedures for establishing and maintaining adequate internal control over financial reporting are broadly in line with those applied by Garanti BBVA, the parent and BBVA, the ultimate parent. GBI’s internal control over financial reporting is a process designed under the supervision of management to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes policies and procedures that: pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of GBI’s assets; provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are made only in accordance with the authorizations of our management and directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, and any use or disposition of our assets that could have a material effect on our financial statements. 30 CORPORATE GOVERNA NC E Managing Board Composition GBI aims to have an adequate and balanced composition of its Managing Board. Thereto, annually, the Supervisory Board assesses the composition of the Managing Board. In the context of such assessment, GBI aims to achieve a gender balance in the Managing Board, with the aim that at least 30 percent of the members would be men and at least 30 percent of the members would be women. However, since GBI needs to balance several other relevant selection criteria when composing its Managing Board, the composition of the Managing Board did not match the above- mentioned gender balance in 2021. GBI will continue to strive for an adequate and balanced composition of the Managing Board in future appointments, by taking into account all relevant selection criteria including but not limited to gender balance, executive experience, experience in corporate governance of large stock-listed companies and experience in the political and social environment. INFORMATION ON MEMBERS OF THE MANAGING BOARD The Managing Board comprises the following members: Name Year of Birth Position Member since Mr. S.E. Zeyneloğlu 1967 Chief Executive Officer 2015 Mr. Ö. Şişman 1977 Chief Financial Officer 2015 Mr. M. Witteveen 1960 Chief Operations Officer 2016 Mr. C.B. Mutlu 1968 Chief Risk Officer 2018 The full profile of the Managing Board can be found in the Charter Governing the Managing Board, which is published on GBI’s websites www.garantibank.eu, www.garantibank.nl and www.garantibank.de. G A R A N T I B B V A I N T E R N AT I O N A L — A N N U A L R E P O R T 2 0 2 1 G A R A N T I B B V A I N T E R N AT I O N A L — A N N U A L R E P O R T 2 0 2 1 31
17. CORPO RAT E G OV E RN A N C E CORPORATE GOVERNA NC E Supervisory Board GBI needs to balance several relevant selection criteria when composing Supervisory Board but strives for an adequate and balanced composition thereof , by taking into account all relevant selection criteria including, but not limited to experience in banking, gender balance, executive experience, experience in corporate governance, and experience in the political and social environment. Future-Oriented Banking The Supervisory Board assesses its composition annually (2021: 20 (twenty) percent women as of July 2021). In the context of such assessment, GBI aims to have a gender balance in its Supervisory Board of at least 30 percent men and at least 30 percent women. All employees must comply with the selfregulations that apply within GBI. The Managing Board and Supervisory Board are responsible for ensuring as such with due regard for each other’s duties and powers. INFORMATION ON MEMBERS OF THE SUPERVISORY BOARD The Supervisory Board currently consists of five members whose combined experience and technical knowledge are suitable for the international and specialized nature of GBI’s businesses from commercial, economic, financial and risk management points of view. GBI applies the principles of Future-Oriented Banking by embedding the assumptions of the Social Charter of the Nederlandse Vereniging van Banken - NVB (Dutch Banking Association) and the rules of conduct associated with the banker’s oath in its Code of Conduct and by embedding the principles of the updated Banking Code in the governance structure. The full profile of the Supervisory Board as of December 2021 can be found in the ‘Charter Governing the Supervisory Board’, which is published on GBI’s websites www.garantibank.eu, www.garantibank.nl and www.garantibank.de. Amsterdam, 23 February 2022 The Managing Board Mr. S.E. Zeyneloğlu, Chief Executive Officer Mr. M.Ö. Şişman Mr. M.J. Witteveen 32 33 Mr. C.B. Mutlu Name Year of Birth Position Member since End of Term Mr. R. Baştuğ 1967 Chairman 2020 2024 Mr. A. Düren 1968 Vice Chairman 2017 2025 Mr. R. van der Linden 1943 Member 2012 2022 Mr. J.H. de Roo 1956 Member 2020 2024 Ms. M. Halverhout 1961 Member 2021 2025 In 2021, the following changes were made to the composition of the Supervisory Board: On 29 July 2021 Mr Düren was re-appointed as member of Supervisory Board for a term of four years; Mr Meesters resigned from the Supervisory Board on 29 July 2021 following the expiry of his last term; Ms Halverhout was appointed on 29 July 2021 as new member to the Supervisory Board for a term of four years. G A R A N T I B B V A I N T E R N AT I O N A L — A N N U A L R E P O R T 2 0 2 1 G A R A N T I B B V A I N T E R N AT I O N A L — A N N U A L R E P O R T 2 0 2 1
18. Report Of The Supervisory Board The Supervisory Board has agreed to transfer the net profit to general reserves 34 36   Financial Statements 36  Financial Statements and   Proposed Dividend 37  Supervisory Board   Meetings 40  Moral and Ethical   Conduct Declaration 35
19. R EP ORT O F T H E S UPE R V I S O RY B OA RDV Financial Statements Supervisory Board Meetings The Supervisory Board has voted to adopt the Managing Board ’s proposal to transfer the net profit of 2021, which totals EUR 18.0 million, to the other reserves rather than paying a dividend. The Supervisory Board met on five occasions during the reporting period, and a quorum of members of the Supervisory Board was present at all meetings. In the meetings, the current business developments and performance of GBI were discussed thoroughly and considerable time was devoted to reviewing the Bank’s strategy, current and future economic challenges, intensified supervision, compliance with compounded international and national regulations, actions to address the requirements of De Nederlandsche Bank (DNB), correspondence with regulators, including the DNB, the Autoriteit Financiële Markten (AFM) and the European Central Bank (ECB); continuous focus on a prudent and proactive credit risk management, the Risk Appetite, and the review and approval of various policies related to the group alignment process with BBVA and the preservation of good relations with our stakeholders. The 2020 annual figures and all related reports were assessed in the presence of our external auditor during the Supervisory Board meeting held on 17 February 2021. The budget for 2022 was discussed and approved during the Supervisory Board meeting held on 17 December 2021. The Board agreed with appointing BDO Audit & Assurance B.V. as the external auditor starting from the year 2021. Subsequently the external audit plan has been approved and the independence of the external auditor has been confirmed for 2021. Developments regarding the COVID-19 and its impact on GBI’s risk management processes and financials have been an ongoing discussion point during 2021. The Managing Board’s presentation incorporated the key developments around the implementation of the strategy, GBI’s switch to the hybrid working environment, the financial impact of macroeconomic forecasts with regards to the provisions of IFRS 9 and the outcomes of loan portfolio reviews. The CFO and CRO attended all meetings and presented financial and risk management issues. The COO presented the implementation of the IT strategy, and the Supervisory Board discussed the steps required to realize our digital vision and elaborated on the outsourcing initiatives. Compliance related updates were discussed at all meetings. During the year, the Chairman of the Supervisory Board maintained close contact with the CEO, in addition to attending regular meetings of the Supervisory Board. The financial statements were drawn up by the Managing Board and were audited in accordance with Article 27, paragraph 1 of the Articles of Association by BDO Audit & Assurance B.V. (BDO). In compliance with the provisions of the Articles of Association of GarantiBank International N.V. (GBI, the Bank), the Supervisory Board has reviewed the Annual Report and approved the financial 36 REPORT OF THE SU PER VISORY B OA RDV statements of the year 2020. In accordance with Article 29 of the Articles of Association, the Supervisory Board advises and proposes that the shareholder adopts the 2021 financial statements at the next Annual General Meeting of Shareholders to be held in 2022. The Supervisory Board also recommends that the Annual General Meeting of Shareholders discharge the members of the Managing Board and the Supervisory Board from their respective management and supervisory duties related to the financial year of 2021. Financial Statements and Proposed Dividend The Supervisory Board has voted to adopt the Managing Board’s proposal to transfer the net profit of 2021, which totals EUR 18.0 million, to the other reserves rather than paying a dividend. G A R A N T I B B V A I N T E R N AT I O N A L — A N N U A L R E P O R T 2 0 2 1 In parallel with the external auditor rotation at the Group level, GBI has initiated a tender for the selection and appointment of the external auditor. Supervisory Board agreed with the Managing Board’s proposal to appoint Ernst & Young Accountants LLP as the external auditor, in line with the Group, starting from the year 2022 during the Supervisory Board meeting held on 16 December 2021 and decided to recommend to the Annual General Meeting of Shareholders to approve the appointment, which was approved accordingly. SUPERVISORY BOARD SUBCOMMITTEE MEETINGS While retaining overall responsibility, the Supervisory Board assigns certain tasks to three permanent committees as listed below and further outlined in the Supervisory Board Charter: Audit and Compliance Committee Risk Committee Remuneration Committee AUDIT AND COMPLIANCE COMMITTEE Members: Mr. A. Düren (Chairman) and B Meesters (until July 2021)/ Ms. M. Halverhout (since July 2021) In 2021, the Audit and Compliance Committee of the Supervisory Board (ACSB) met five times. The Audit and Compliance Committee assists the Supervisory Board in supervising the activities of the Managing Board with respect to: (a) the quality and effectiveness of the internal risk management and controls systems of the Bank, including supervision of the enforcement of relevant laws and regulations and operation of the Codes of Conduct, Whistleblower regulations and corporate governance framework; (b) overseeing the quality and efficiency of the financial reporting processes; (c) submitting proposals for the selection, appointment, re-election and replacement of the external auditor; (d) ensuring that the internal audit and compliance functions can complete their responsibilities in an independent manner; (e) internal audit and compliance activities, findings, reports; and acting as the ultimate reporting authority for the internal audit and G A R A N T I B B V A I N T E R N AT I O N A L — A N N U A L R E P O R T 2 0 2 1 37
20. R EP ORT O F T H E S UPE R V I S O RY B OA RDV compliance departments ; (f) ensuring that the recommendations of the internal and external auditors and that deficiencies identified are remedied within the appropriate time frames; (g) overseeing external auditor independence and fees. 38 During 2021, the Audit and Compliance Committee has paid and will continue to pay special attention to the follow-up of the examinations of the supervisory authorities, compliance with regulations on Customer Due Diligence and Anti-Money Laundering, ongoing training and strengthening of three lines of defense controls, including related processes and procedures, and culture and awareness of non-financial and integrity risks. Further attention has also been paid to the implementation of laws and regulations, such as DGS (3.0), AnaCredit, AMLD4, MiFID II, PSD2 and GDPR. The Supervisory Board is regularly provided with follow-up reports and closely monitors progress made regarding GBI’s ongoing commitment to meet regulatory recommendations. The Committee has discussed the external audit plan for 2021 and assessed the independence of the external auditor through the Group. The Committee discussed the report of the external auditor regarding the audit of the 2020 financial statements, including the management letter observations. The Committee has closely followed up the developments regarding the tender for the appointment of a new external auditor for year 2022 as per the European Commission (EC) Regulation 537/2014, since BBVA has decided to rotate its external auditor. Following a thorough evaluation of the independence conditions that are applicable at BBVA Group level as per the said EC Regulation and assessment of the quality of the audit engagement proposal through the Audit and Compliance Committee of the Supervisory REPORT OF THE SU PER VISORY B OA RDV Board, the Managing Board has proposed to appoint Ernst & Young Accountants LLP. as the external auditor starting from the year 2022. After careful evaluation of the proposal and having a direct meeting with the audit firm representatives during the Committee meeting held on 16 December 2021, the Committee agreed with the proposal and decided to positively advise the Supervisory Board on the appointment. The Risk Committee monitors and periodically assesses the effectiveness of GBI’s risk governance. In this capacity, the Risk Committee reviewed the Risk Appetite Statement and various Management Policies, such as the Credit Policies, Market Risk Policy, Liquidity Risk Policies, Interest Rate Risk Policy, Operational Risk Policies, Concentration Policies and Investment Policy, and submitted its recommendations to the Supervisory Board for approval. RISK COMMITTEE The Risk Committee also discusses DNB and ECB reports, such as the SREP letter, and ensures that the findings are addressed adequately. It also reviews and approves the Bank’s Pillar 3 Disclosures before publication. Members: Mr. H. de Roo (Chairman), Mr. A. Düren The Risk Committee of the Supervisory Board met five times in 2021. The Risk Committee assists the Supervisory Board with its responsibilities related to the supervision of the Managing Board’s activities with respect to the review and assessment, as appropriate, of risk management policies, practices and processes through the establishment and maintenance of an effective risk management framework, including the corporate risk policies for each risk type. It also advises the Supervisory Board in regard to the adoption of said policies and analyzes and assesses the control and management policies of the GBI’s different risks and information and internal control systems, including the Risk Appetite Statement together with other risk appetite framework metrics of GBI, ICAAP and ILAAP. The Committee manages an agenda on all material risk areas requiring Supervisory Board approval concerning proposals and recommendations, as per an initiative led by the Managing Board or the Supervisory Board. Supervisory Board discussed the steps required to realize our digital vision and elaborated on the outsourcing initiatives. G A R A N T I B B V A I N T E R N AT I O N A L — A N N U A L R E P O R T 2 0 2 1 COVID-19 and its impact has been a regular discussion point. The Committee has received detailed information regarding the developments and provided feedback to the Managing Board regarding, among other issues, credit risk issues and business model. REMUNERATION COMMITTEE Members: Mr. R. van der Linden (Chairman), and Mr. R. Baştuğ The Remuneration Committee of the Supervisory Board met five times in 2021. The role of the Remuneration Committee is to assist the Supervisory Board in supervising the activities of the Managing Board with respect to: (a) the design, implementation and approval of a long-term remuneration policy that is in line with the Bank’s strategy, risk appetite, objectives and values, taking into account the long-term interests of the Bank, the relevant international context and wider social acceptance; (b) the terms and conditions of employment and remuneration of the Managing Board members, overseeing performance targets to be set by the Managing Board members and the Managing Board as a whole; (c) the design, approval and evaluation of the remuneration policy for Identified Staff and senior management. During its meetings, the Remuneration Committee considered various personnel issues such as strategic personnel planning, the vitality plan, employee engagement, the new way of working in the hybrid model, personnel budget and remuneration packages of the Managing Board, the variable remuneration for Identified Staff, the total amount of fixed salaries for 2021 and the total amount of variable remuneration to be distributed within GBI. Proposed remuneration packages including fixed and variable components, training budget, pension plans and promotions were reviewed and approved. Additionally, the Remuneration Policy was reviewed and proposed to the Supervisory Board for various updates. GOVERNANCE Effective corporate governance in accordance with high international standards is fundamental for us. The Supervisory Board will ensure responsible, value-driven management and control of GBI through strong corporate governance. This has five key elements: Good relations with all stakeholders Effective cooperation between the Managing Board and the Supervisory Board Sound remuneration policy for all staff Transparent reporting system Sound and ethical operations in accordance with GBI’s mission, strategy and objectives. The Charter Governing the Supervisory Board contains the Supervisory Board Principles of the Banking Code. The content of this charter is taken from the Articles of Association, the Dutch legislation, Capital Requirements Directive and the respective EU directives, EBA guidelines on internal governance and the Banking Code. The charter concerns the roles and responsibilities of the Supervisory Board, the supervision of the activities of the Managing Board, and the composition and structure of the Supervisory Board. This includes (re)appointment, rotation plans, retirement, meeting schedules, adoption of resolutions, conflicts of interest, and permanent education. The charter describes the different committees of the board, the co-operation with the Managing Board and also includes a Supervisory Board profile. Additionally, the individual personal details of each board member are described. GBI meets the requirements that the Supervisory Board is composed in such a way that it is able to perform its tasks properly, ensuring that the competence, experience and independence requirements of the members are met. The governance of the Managing Board is in compliance with the Executive Board Principles of the Banking Code. The three-yearly external self-assessment of the Supervisory Board and its overall functioning was carried out by an external firm in November 2020 and discussed by the end of 2020. The annual selfevalution form for the past year has been circulated in line with the requirements prescribed by the Banking Code. G A R A N T I B B V A I N T E R N AT I O N A L — A N N U A L R E P O R T 2 0 2 1 39
21. R EP ORT O F T H E S UPE R V I S O RY B OA RDV REPORT OF THE SU PER VISORY B OA RDV Moral and Ethical Conduct Declaration The members of the Managing Board have signed the moral and ethical conduct declaration . By this declaration, the members declare to perform their duties as bankers with integrity and care, and that they will prioritize the customers’ interests. The moral and ethical conduct declaration is published on GBI’s website www.garantibank.eu. Furthermore, as per the rules of conduct established by the NVB, all GBI personnel, the Supervisory Board members and the Managing Board members have taken the Banker’s Oath. PERMANENT EDUCATION 40 GBI annually organizes a permanent education program for the members of the Managing Board and the Supervisory Board, as required by the Banking Code. Each year, a subject is touched upon in the form of a workshop. Due to the COVID-19 situation, no physical meeting was organized in 2021, but GBI has organized an online training session on actual topics for SB and MB members to support their permanent education program. RISK MANAGEMENT As a financial institution, GBI is exposed to a variety of risks. To ensure measured risk taking, we have integrated risk management into our daily activities and strategic planning. The Risk Management Department assists with the formulation of its risk appetite, risk strategy and policies, and provides an overview, supervision and support function with regards to risk-related issues. Risk management is frequently addressed in Supervisory Board meetings and in the meetings of the Supervisory Board’s Risk Committee. Our risk appetite is discussed yearly and approved by the Supervisory Board. The Supervisory Board supervises the risk policy applied by the Managing Board, and as part of its supervision, discusses the GBI’s risk profile and assesses at a strategic level whether the capital allocation and liquidity position of GBI and its operations are in line with our approved risk appetite. In the performance of this supervisory role, the Supervisory Board is advised by its Risk Committee. GBI’s Managing Board has also established a Risk Management Committee, which supervises all risk management activities at the Bank. The Committee includes several members of the Managing Board. The Risk Management principles of the Dutch Banking Code are adequately met. Our risk policy is characterized by its comprehensive approach, it is transparent and has both a short-term and longterm focus, taking into account reputational and non-financial risks. Detailed disclosures on GBI’s risk management practices can be found in the Report on Capital Adequacy and Risk Management, which is published on GBI’s website www.garantibank.eu. OPERATIONAL RISK ADMISSION AND PRODUCT GOVERNANCE PROCESS The governance around the new business, product, service or outsourcing initiative is explained in the Operational Risk Admission and Product Governance (ORA&PG) Policy, which is approved by the Supervisory Board. The ORA&PG Policy covers the entire process, starting from the initial proposal until the business or product is approved according to the assessment and approval processes. New products and services that will go through the ORA&PG shall not be introduced to the market or distributed to various channels without prior careful examination of the risks for GBI as well as the client, and without the approval of the ORA&PG Committee. ORA & PG Committee, which consists of the Managing Board members and related Management Team members, is the ultimate body to approve or disapprove the introduction of a new product. New business that will go through the ORA&PG process will be further escalated to the Supervisory Board for final approval. INTERNAL AUDIT GBI assumes all related Dutch and EU regulations, the guidelines of the Basel Committee on Banking Supervision and the Institute of Internal Auditors regarding the Internal Audit function, which is formed as an independent, objective assurance and consulting activity designed to add value and improve the operations of the organization. An independent Audit function directly reports to the Audit and Compliance Committee of the G A R A N T I B B V A I N T E R N AT I O N A L — A N N U A L R E P O R T 2 0 2 1 Supervisory Board. The Chief Audit Executive is always present in meetings held by the Audit and Compliance Committee of the Supervisory Board. Furthermore, the external auditor sometimes takes part in the Audit and Compliance Committee meetings. REMUNERATION GBI has implemented a meticulous, restrained and long-term remuneration policy in line with our strategy and risk appetite. The policy focuses on ensuring sound and effective risk management through: a stringent governance structure for setting goals and communicating these goals to the employees including both financial and non-financial goals in performance and result assessments making fixed salaries the main remuneration component The policy reflects GBI’s objectives for good corporate governance and meets the requirements established in DNB’s Guidelines on Controlled Remuneration Policy and the Dutch Banking Code, except for one item which has been neutralized by applying the proportionality principle. GBI will not meet the bonus share part of the guidelines as employees of GBI are not rewarded with shares of GBI. Shareholders. A description of the composition, duties and authority of the Remuneration Committee is defined in the remuneration policy and the Charter of the Supervisory Board. In 2021, none of the Managing Board members received an annual remuneration of more than EUR 1 million. The annual amount of variable remuneration paid out to natural persons amounts to EUR 0.88 million in 2021, which includes the deferred payments of the previous performance years amounting to EUR 0.27 million. As of 2021, one GBI employee was identified who met the quantitative criteria of the Group policy on annual variable compensation. The Supervisory Board would like to thank the members of the Managing Board and all staff for their hard work and appreciate their strong commitment to the Bank under difficult circumstances in 2021. Amsterdam, 23 February 2022 THE SUPERVISORY BOARD Mr. R. Baştuğ (Chairman) Mr. A. Düren (Vice Chairman) Mr. P.R.H.M. van der Linden Ms. M. Halverhout Mr. J.H. de Roo GBI is following the Group policy on Annual Variable Compensation for certain identified staff members. This policy stipulates how the variable remuneration granted under the GBI remuneration policy to those identified staff members should be treated. For 2021, 60 percent of the annual variable compensation, as shares or as cash, will be paid in 2022 and the remaining 40 percent will be payable, if applicable, in 2024. Amounts deferred from the 2021 annual variable remuneration, both in cash and in shares, will be subject to multi-year performance indicators during the deferral period. Once a year, the Remuneration Committee monitors compliance with the remuneration policy. The Remuneration Committee submits any policy adjustments for review to the Supervisory Board and for adoption to the Annual General Meeting of G A R A N T I B B V A I N T E R N AT I O N A L — A N N U A L R E P O R T 2 0 2 1 41
22. CONTACT INFORMATION Head Office Keizersgracht 569-575 1017 DR Amsterdam The Netherlands Telephone : + 31 20 553 9700 Facsimile: + 31 20 624 2466 SWIFT: UGBINL2A www.garantibank.eu info@garantibank.eu Düsseldorf Branch Tersteegenstrasse 2840474 Düsseldorf Germany Telephone: + 49 211 86 222 301 Facsimile: + 49 211 86 222 350 Swift: UGBIDEDD www.garantibank.de info@garantibank.de Representative Offices TURKEY REPRESENTATIVE OFFICE Mr. Berat İçinsel Representative & Executive Director Nispetiye Mah. Aytar Cad. No: 2, Kat: 1 34340 Levent/Besiktas, Istanbul, Turkey IstanbulRepOffice@garantibank.eu SWITZERLAND REPRESENTATIVE OFFICE Ms. Şirin Yüce Giess Representative Rue de la Confédération 5 Geneva, 1204, Switzerland Telephone: + 41 22 591 18 92 Facsimile: + 41 22 591 18 99 GenevaRepOffice@garantibank.eu 43
23. 44 garantibank .eu
24. Financial Statements 2021 GARANTIBANK INTERNATIONAL N .V. 45
25. Content of Financial Statements Financial Statements Statement of Financial Position 47 47 Statement of Comprehensive Income 48 Statement of Changes in Equity 50 Statement of Cash flows 52 Notes to the financial statements 54 Reporting entity 54 Authorisation of the financial statements 54 Basis of preparation 54 Use of estimates and judgements 54 Change in accounting policies 57 New and revised IFRSs in issue but not yet effective 58 Significant accounting policies 59 Notes to the statement of financial position and statement of comprehensive income 74 Risk Management 101 Introduction 101 Credit Risk 103 Market risk 121 Liquidity and Funding Risk 131 Country by country reporting 135 Subsequent Events 135
26. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Financial Statements Financial Statements 1.1 Statement of Financial Position As at 31 December 2021 Notes 31 December 2021 31 December 2020 Assets Cash and balances with central banks 3 675,396 524,911 Loans and advances to banks 4 620,651 654,241 6 284 317 Financial assets at fair value through profit or loss - Mandatorily at fair value through profit or loss - Trading derivatives 40 5,128 2,551 - Non-trading derivatives 40 3,116 1,714 7 250,198 102,773 Loans and advances to customers 5 2,535,213 2,092,514 Property and equipment 8 31,068 31,905 Intangible assets 9 5,398 5,818 Financial assets at fair value through other comprehensive income Current tax asset 14 1,851 7,917 Other assets 10 1,573 5,515 4,129,876 3,430,176 Total Assets Liabilities Deposits from banks 11 409,982 344,614 Deposits from customers 12 3,037,822 2,444,457 Financial liabilities at fair value through profit or loss - Trading derivatives 40 5,041 1,531 - Non-trading derivatives 40 21,914 7,772 Subordinated liabilities 13 - - Deferred tax liability 14 3,711 3,429 Other liabilities 15 31,641 27,498 3,510,111 2,829,301 136,836 136,836 470,069 451,598 12,860 12,441 619,765 600,875 4,129,876 3,430,176 420,039 558,665 Total Liabilities Equity Share capital 16 Retained earnings Other reserves 16 Total Equity attributable to owners of the Bank Total Liabilities and Equity Commitments and Contingencies 18 47
27. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Financial Statements Statement of Comprehensive Income For The Year Ended 31 December 2021 Notes 2021 2020 Statement of Income: Interest income using effective interest method 19 73,414 76,313 Interest expense using effective interest method 19 (20,293) (29,420) 53,121 46,893 Net interest income Fee and commission income 20 20,945 13,295 Fee and commission expense 20 (3,551) (2,353) 17,394 10,942 Net fee and commission income Valuation results and net trading income 21 2,459 1,871 Investment income 22 - - Other income and expenses 23 (3,339) (3,400) 69,635 56,306 Total income Expected credit losses on financial instruments 31 (4,687) (6,245) Personnel expenses 25 (26,326) (26,770) Depreciation and amortisation 8/9 (3,310) (3,116) Other operating expenses 24 (10,925) (10,788) (45,248) (46,919) 24,387 9,387 (6,376) (2,584) 18,011 6,803 45 33 (12) (8) 33 25 Total expenses Profit before tax Income tax expense 14 Profit for the year Other Comprehensive Income Items that will not to be reclassified to profit or loss: Property and equipment Revaluation 8 Tax effect (deferred) Net gain on revaluation of property and equipment Items that may subsequently be reclassified to profit or loss: Cash flow hedges Effective portion of changes in fair value 40 940 59 Reclassified to profit or loss 40 264 1,042 (300) (275) 904 826 Tax effect (deferred) Net gain on cash flow hedges 48
28. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Financial Statements Notes 2021 2020 Valuation results 7 (77) 1,635 Reclassification to profit or loss 7 19 (409) (58) 1,226 879 2,077 18,890 8,880 Debt instruments at fair value through other comprehensive income Tax effect (current) Net gain/ (loss) on debt instruments at fair value through other comprehensive income Total other comprehensive income for the year, net of tax attributable to the shareholder Total comprehensive income for the year, net of tax attributable to the shareholder 49 -
29. GarantiBank International N .V. Financial Statements As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) Statement of Changes in Equity Balance as at 1 January 2021 Share Capital and Share Premium Fair value reserve investments Hedging Reserve Other legal reserves Retained Earnings Total Equity 136,836 91 (1,067) 13,417 451,598 600,875 18,011 18,011 Profit for the year Other comprehensive income Net unrealised gains/(losses) on fair value assets portfolio (133) Net gains/(losses) on fair value assets and cash flow hedges transferred to profit or loss Foreign currency translation differences on fair value portfolio (133) - (5) Net fair value gains/(losses) from cash flow hedges (5) 904 Net change in expected credit losses on FVOCI portfolio 80 80 Revaluation surplus on building Total comprehensive income 904 33 - (58) 904 33 33 18.011 18,890 (460) 460 - 12,990 470,069 619,765 Translation differences Other movements Balances as at 31 December 2021 136,836 33 50 (163)
30. GarantiBank International N .V. Financial Statements Balance as at 1 January 2020 As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) Share Capital and Share Premium Fair value reserve investments Hedging Reserve Other legal reserves Retained Earnings Total Equity 136,836 (1,135) (1,893) 12,808 445,379 591,995 6,803 6,803 Profit for the year Other comprehensive income Net unrealised gains/(losses) on fair value assets portfolio Net gains/(losses) on fair value assets and cash flow hedges transferred to profit or loss Foreign currency translation differences on fair value portfolio 1,163 1,163 (101) (101) Net fair value gains/(losses) from cash flow hedges 826 Net change in expected credit losses on FVOCI portfolio 826 164 164 Revaluation surplus on building 25 Total comprehensive income 1,226 826 25 25 6,803 8,880 584 (584) - 13,417 451,598 600,875 Translation differences Other movements Balances as at 31 December 2020 136,836 91 51 (1,067)
31. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Financial Statements Statement of Cash flows For the year ended 31 December 2021 1 January 2021 - 31 December 2021 1 January 2020 31 December 2020 18,011 6,803 8, 9 3,310 3,116 Expected credit losses on financial instruments 31 4,687 6,245 Tax expense 14 6,376 2,584 32,384 18,748 4 61,447 (347,509) 6, 40 (3,946) 4,397 (447,386) 335,461 Notes Cash flows from operating activities: Profit for the year Adjustments for: Depreciation and amortisation Changes in: Loans and advances to banks Financial assets at fair value through profit or loss Loans and advances to customers 5 Other assets 10 3,937 455 Deposits from banks 11 98,981 101,528 Deposits from customers 12 593,365 (286,906) Financial liabilities at fair value through profit or loss 40 17,652 (5,516) Other liabilities, accrued expenses and provisions 15 4,143 (1,358) 360,577 (180,700) (28) (2,390) 359,366 (183,090) Income taxes paid Net cash from/ (used in) operating activities Cash flows from investing activities: Acquisitions in investment portfolio 7 (210,716) (29,122) Proceeds from investment portfolio 7 63,291 - Purchase of tangible and intangible assets 8 (2,061) (2,710) (149,486) (31,832) Net cash from/ (used in) investing activities 52
32. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Financial Statements Statement of Cash flows (continued) 1 January 2021 - 31 December 2021 1 January 2020 - 31 December 2020 (Decrease)/increase in subordinated liabilities, net - (50,398) Net cash from/ (used in) financing activities - (50,398) 848 2,592 211,911 (262,728) Notes Cash flows from financing activities: Effect of exchange rate changes Net increase/ (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the period 1 490,183 752,911 Cash and cash equivalents at the end of the period 1 702,094 490,183 95,601 95,661 (26,448) (36,938) Additional information on operational cash flows from interest Interest received Interest paid 53
33. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements Notes to the financial statements Notes to the accounting policies Reporting entity GarantiBank International N.V. (hereafter: ‘GBI’ or ‘the Bank’) has its statutory seat in Amsterdam, The Netherlands. Its head office is located at Keizersgracht 569-575, 1017 DR Amsterdam, The Netherlands. Its Chamber of Commerce number is 33225009. The Bank also operates a branch in Germany. The financial information of GBI is included in the financial statements of its parent Türkiye Garanti Bankasi A.Ş. (TGB), incorporated in Turkey, and in those of the ultimate parent of the group, Banco Bilbao Vizcaya Argentaria S.A. (BBVA), incorporated in Spain. GBI works in close cooperation with its parent, which owns 100% of the shares of GBI, and with the ultimate parent of the group, which owns 49.85% of the shares of Türkiye Garanti Bankasi A.Ş. GBI is mainly active in international trade finance and corporate lending, as well as in retail banking. Authorisation of the financial statements On 23 February 2022, the Managing Board prepared the annual accounts of GBI as at and for the year ended 31 December 2021 and the Supervisory Board adopted a resolution, to propose that the Shareholder adopt the 2021 financial statements at the next Annual General Meeting of Shareholders to be held in 2022. Basis of preparation The GBI financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and the relevant articles of Part 9 of Book 2 of the Dutch Civil Code. IFRS as adopted by the EU are IFRS Standards and IFRS Interpretations as issued by the International Accounting Standards Board (IASB) and the IFRS Interpretations Committee (IFRIC). GBI’s annual accounts have been prepared on a going concern basis. Use of estimates and judgements The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Notable areas that involved judgements, estimates and assumptions are: • Credit risk of financial instruments as disclosed in notes 31 to 36: Judgement is exercised in determining the extent of the expected credit loss (ECL) for financial assets assessed for impairment both individually and collectively. The ECL for financial assets is based on assumptions about risk of default and expected loss rates. GBI uses judgement in making these assumptions and selecting the inputs to the ECL calculation, based on the historical observations, existing market conditions as well as forward-looking estimates at the end of each reporting period. Changes in such judgements and analyses may lead to changes in the ECL over time. 54
34. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements Use of estimates and judgements (continued) The key judgement areas are: o The criteria for identifying a significant increase in credit risk: A financial asset moves from Stage 1 to Stage 2 when there is a significant increase in credit risk (SICR) since initial recognition. GBI assesses significant increase in credit risk using qualitative and quantitative assessments. The qualitative assessments require a considerable level of judgement from the credit officers that perform the assessment as well as from the members of the credit committee that review and approve the assessments. For the quantitative assessment the Bank compares the risk of default occurring at the reporting date with the risk of default occurring at the initial recognition of the financial asset. Internal credit rating models are used for determining the probability of default (PD) of each financial asset. Judgement is used to determine whether the stage allocation thresholds are suitable for statutory reporting purposes and to assess the need for management overlays to reflect the impact of COVID-19 on the financial performance of an obligor. Such judgements are reviewed and approved by related management committees of the Bank. The process of comparing a financial asset’s PD with the PD banding thresholds determines its ECL stage. Assets in Stage 1 are allocated a 12 month ECL, and those in Stage 2 are allocated a lifetime ECL, and the difference is often significant. As such, the assumptions made in setting PD banding thresholds constitute a key source of estimation uncertainty. Analysis of the sensitivity associated with the assessment of significant increase in credit risk is presented in the Risk Management section of this report. o Assumptions used to measure ECL, including the use of forward-looking and macroeconomic information for individual and collective ECL assessment: Individually assessed loans (Stage 2 and 3): Individual provisions are calculated using the discounted expected future cash flow method. To determine expected future cash flows, three or more scenarios are used. Each scenario is analysed based on the probability of occurrence and includes forward looking information. In determining the scenarios, all relevant factors impacting the future cash flows are taken into account. These include expected developments in credit quality, business and economic forecasts, and estimates about recoveries, including the recoveries from the collaterals (where applicable), taking into account the structure of the financial asset and GBI’s restructuring/recovery strategy. The macroeconomic forecast is captured in the estimation, as the expected future macroeconomic situation serves as basis for the cash flows in the scenarios. The update of macroeconomic forecasts to reflect the circumstances created by the COVID-19 pandemic is characterized by a high degree of uncertainty regarding its intensity, duration and speed of recovery. Hence management has chosen to apply haircuts in relation to the valuation of collateral. For the individual assessment, with granular (company-specific) scenarios, specific factors can have a larger impact on the future cash flows than macroeconomic factors (i.e. for the country as a whole). Collectively assessed loans (Stages 1 and 2) using ECL models: For the purposes of a collective evaluation of ECL’s, financial assets are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated. Expected future cash flows in a portfolio of financial assets that are collectively evaluated for ECL’s, are estimated on the basis of the contractual cash flows of the assets in the portfolio, GBI’s expectations on future economic developments and historical loss experience for assets with credit risk characteristics similar to those in the portfolio. The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Given that modelling assumptions and calculation methodologies that prevail in normal times may prove impaired in the current context of extraordinary uncertainty, management assesses the need for overlays based on expert opinion. The outcome of the models reflects forward looking macro-economic information. The update of the forward looking information in the IFRS 9 models in order to reflect the circumstances created by the COVID-19 pandemic in the macroeconomic environment, is 55
35. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements characterized by a high degree of uncertainty regarding its intensity, duration and speed of recovery. o • Assessment of a default: in certain cases, judgement is exercised in GBI’s evaluation of whether there is objective evidence of impairment (e.g. in relation to assessing ‘financial difficulties’ of a borrower). Fair value measurement of financial instruments: Even if quoted market prices and observable inputs are available, when markets are less liquid there may be a range of prices and inputs for the same asset from different sources. Selecting the most appropriate price or input requires judgement and could result in different estimates of fair value. Valuation techniques are subjective in nature and, depending on the liquidity of the market and the extent parameters are unobservable, the valuation uncertainty increases and hence significant judgement is involved in establishing fair values for certain assets and liabilities. Valuation techniques involve various assumptions regarding pricing factors. The use of different valuation techniques and assumptions could produce significantly different estimates of fair value. 56
36. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements Change in accounting policies The following standards and amendents became effective in 2021: • Amendments to IFRS 4 Insurance Contracts – deferral of IFRS19 (issued on 25 June 2020). • Amendments to IFRS 16 Leases Covid-19 Related Rent Concessions beyond 30 June 2021 (issued on 31 march 2021). • Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 Interest Rate Benchmark Reform – Phase 2 (issued on 27 August 2020); The amendments to IFRS 4 and IFRS 16 do not have an impact on the Bank’s financial statements in 2021. The amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 Interest Rate Benchmark Reform – Phase 2 have a profound impact on the Bank’s operations. Due to the interest rate reform certain benchmarks will be replaced while others are being reformed. In both cases contractual relations between GBI and counterparties that rely on such interest rate benchmarks are affected. Depending on the amendments to those contractual arrangements, certain changes have been made to the IT systems to accommodate the new benchmarks, to calculate the amortised cost and measure hedge effectiveness. The amendments include a number of reliefs and additional disclosures to be applied in relation to the interest rate reform to minimise the impact on the financial statements. The reliefs apply upon the transition of a financial instrument from an IBOR to a risk-free-rate (RFR). Changes to the basis for determining contractual cash flows as a result of interest rate benchmark reform are required as a practical expedient to be treated as changes to a floating interest rate, provided that, for the financial instrument, the transition from the IBOR benchmark rate to RFR takes place on an economically equivalent basis. Furthermore IBOR reform Phase 2 provides temporary reliefs that allow the Bank’s hedging relationships to continue upon the replacement of an existing interest rate benchmark with an RFR. For existing hedge relationships as per the end of 2021, the impact of IBOR is limited. However, for new hedge relationships the Bank amended it’s standardised hedge documentation. This includes redefining the hedged risk to reference an RFR, redefining the description of the hedging instrument and / or the hedged item to reference the RFR and amending the method for assessing hedge effectiveness. The Bank may designate an interest rate as a non-contractually specified, hedged risk component of changes in the fair value or cash flows of a hedged item, provided the interest rate risk component is separately identifiable, e.g., it is an established benchmark that is widely used in the market to price loans and derivatives. For new RFRs that are not yet an established benchmark, relief is provided from this requirement provided the Bank reasonably expects the RFR to become separately identifiable within 12 months. For hedges of groups of items, the Bank is required to transfer to subgroups those instruments that reference RFRs. Any hedging relationships that prior to application of IBOR reform Phase 2, have been discontinued solely due to IBOR reform and meet the qualifying criteria for hedge accounting when IBOR reform Phase 2 is applied, must be reinstated upon initial application. The other amendments and standards are not expected to have a significant impact on the Bank’s financial statements once they become effective. 57
37. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements New and revised IFRSs in issue but not yet effective Standards endorsed by the EU The following published standards and amendments are effective for annual periods beginning on or after 1 January 2022 and have been endorsed by the EU and have not been early adopted by GBI. • Amendments (issued on 18 May 2020) to: o IFRS 3 Business Combinations; o IAS 16 Property, Plant and Equipment; o IAS 37 Provisions, Contingent Liabilities and Contingent Assets; o Annual Improvements 2018-2020 (All issued 14 May 2020). The amendments do not have an impact on the Bank’s financial statements in 2021. Standards not yet endorsed by the EU For the following published amendments that have not been endorsed by the EU yet, GBI is in the process of assessing the detailed impact thereof: • IFRS 17 Insurance Contracts (issued on 18 May 2017) including Amendments to IFRS 17 (issued on 25 June 2020). • Amendments to IAS 1 Presentation of Financial Statements: Classification of Liabilities as Current or Non-current and Classification of Liabilities as Current or Non-curre.nt - Deferral of Effective Date (issued on 23 January 2020 and 15 July 2020 respectively) • Amendments to IAS 1 Presentation of Financial Statements and IFRS Practice Statement 2: Disclosures of Accounting policies (issued on 12 February 2021). • Amendments to IAS 8 Accounting policies, Changes in Accounting Estimates and Errors: Definition of Accounting Estimates (issued on 12 February 2021). • Amendments to IAS 12 Income Taxes: Deferred Tax related to Assets and Liabilities arising from a Single Transaction (issued on 7 May 2021). The amendments do not have an impact on the Bank’s financial statements in 2021. Changes to prior year financial statements and disclosures Certain figures reported in the 2020 annual report have been reclassified for consistency with the presentation applied within these financial statements and disclosures. These changes are presentational in nature and do not change the previously reported financial results for the year ended 31 December 2020 nor the aggregate assets and liabilities at that date. 58
38. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements Significant accounting policies Foreign currency Transactions in the financial statements of the Bank are recorded in EUR, which is the Bank’s functional currency and the presentation currency for the accompanying financial statements. Transactions in foreign currencies are translated into the functional currency of the Bank at exchange rates applicable at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into EUR at the exchange rates applicable at date of the statement of financial position with the resulting exchange differences recognized in income as foreign exchange gain or loss. Gains and losses arising from foreign currency transactions are reflected in income as realized during the period. Non-monetary items that are measured at historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Exchange rate differences on non-monetary items, measured at fair value through profit or loss, are reported as part of the fair value gain or loss. Nonmonetary items are translated at the date fair value is determined. Property and equipment and related depreciation and amortisation At initial recognition, property and equipment (PPE assets) are measured at cost. After initial recognition, the Bank applies the revaluation model for properties and the cost model for all other PPE assets. Accordingly, properties are carried at a revalued amount, being their fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated expected credit losses. For all significant properties, a valuation study is performed by independent expertise firms in accordance with the Royal Institution of Chartered Surveyors (RICS) on an annual basis as part of the year-end closing routine to assess the fair value, which is defined as the price received to sell an asset in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions. Subsequent expenditure Other subsequent expenditures are capitalized only when it increases the future economic benefits embodied in the item of such assets. All other expenditures are reflected as expense in the statement of income as incurred. Expenditures for major renewals and improvement of PPE assets are capitalized and depreciated over the remaining useful lives of the related assets. Depreciation The estimated useful lives and depreciation rates of PPE assets are as follows. Depreciation and amortisation method in use is the straight-line method and was not changed in the current period. Estimated useful lives (years) PPE Assets Properties Improvement of properties Renovation of properties Furniture and equipment 50 50 10-15 5-10 Depreciation Rates (%) 2 2 6.67-10 10-20 The estimated useful lives, residual values and depreciation methods are reviewed at least once a year, with the effect of any changes in estimate accounted for on a prospective basis. 59
39. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements Significant accounting policies (continued) Intangible assets As per IAS 38, internally generated software should be recognised as intangible assets, if they meet all the below listed criteria: - The technical feasibility of completing the asset so that it will be available for use, - Availability of the intention to complete and use the asset, - The ability to use the asset, - Clarity in probable future economic benefits to be generated from the asset, - The availability of adequate technical, financial and other resources to complete the development phase and to start using the asset, and - The availability to measure reliably the expenditure attributable to the asset during the development phase. The directly attributable development costs of intangible assets are included in the cost of such assets, however the research costs are recognised as expense as incurred. Subsequent expenditure Other subsequent expenditures are capitalized only when it increases the future economic benefits embodied in the item of such assets. All other expenditures are reflected as expense in the statement of income as incurred. Expenditures for major renewals and improvement of intangible assets are capitalized and depreciated over the remaining useful lives of the related assets. Depreciation The estimated useful lives is between 2 and 10 years and the depreciation rates are between 10% and 50% for intangible assets. Depreciation and amortisation method in use is the straight-line method and was not changed in the current period. The estimated useful lives, residual values and depreciation methods are reviewed at least once a year, with the effect of any changes in estimate accounted for on a prospective basis. Leases At inception of a contract, the Bank (as lessee) assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Bank uses the definition of a lease in IFRS 16. For all leases not being a car lease, the Bank has elected not to separate non-lease components and account for the lease and associated non-lease components as a single lease component. The Bank recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the end of the lease term, unless the lease transfers ownership of the underlying asset to the Bank by the end of the lease term or the cost of the right-of-use asset reflects that the Bank will exercise a purchase option. In that case the right-of-use asset will be depreciated over the useful life 60
40. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements Significant accounting policies (continued) of the underlying asset, which is determined on the same basis as those of property and equipment. In addition, the right-of-use asset is periodically reduced by impairments, if any, and adjusted for certain remeasurements of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Bank’s incremental borrowing rate. Generally, the Bank uses its incremental borrowing rate as the discount rate. The Bank determines its incremental borrowing rate by obtaining interest rates from various external financing sources and makes certain adjustments to reflect the terms of the lease and type of the asset leased. Lease payments included in the measurement of the lease liability comprise the following: • • • • fixed payments, including in-substance fixed payments; variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date; amounts expected to be payable under a residual value guarantee; and the exercise price under a purchase option that the Bank is reasonably certain to exercise, lease payments in an optional renewal period if the Bank is reasonably certain to exercise an extension option, and penalties for early termination of a lease unless the Bank is reasonably certain not to terminate early. The lease liability is measured at amortised cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Bank’s estimate of the amount expected to be payable under a residual value guarantee, if the Bank changes its assessment of whether it will exercise a purchase, extension or termination option or if there is a revised in-substance fixed lease payment. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-ofuse asset has been reduced to zero. The Bank presents right-of-use assets in ‘ tangible and intangible assets’ and borrowings’ in the statement of financial position. Short-term leases and leases of low-value assets The Bank has elected not to recognise right-of-use assets and lease liabilities for leases of low-value assets and short-term leases, including IT equipment. The Bank recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term. For contracts entered into before 1 January 2019, the Bank determined whether the arrangement was or contained a lease based on the assessment of whether: - fulfilment of the arrangement was dependent on the use of a specific asset or assets; and the arrangement had conveyed a right to use the asset. Financial instruments Recognition and derecognition of Financial instruments Recognition of financial assets Financial assets are intitially recognised in the balance sheet at fair value when the Bank becomes a party to the contractual provisions of the instruments. Debt securities and derivatives are recognised using 61
41. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements Significant accounting policies (continued) trade date accounting. Trade date is the date on which the Bank commits to purchase or sell the asset. Loans and advances and repurchase agreements are recognised using settlement date accounting. Financial instruments Recognition and derecognition of Financial instruments Recognition of financial assets Financial assets are intitially recognised in the balance sheet at fair value when the Bank becomes a party to the contractual provisions of the instruments. Debt securities and derivatives are recognised using trade date accounting. Trade date is the date on which the Bank commits to purchase or sell the asset. Loans and advances and repurchase agreements are recognised using settlement date accounting. Derecognition of financial assets Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Bank has transferred substantially all risks and rewards of ownership. If the Bank neither transfers nor retains substantially all the risks and rewards of ownership of a financial asset, it derecognises the financial asset if it no longer has control over the asset. The difference between the carrying amount of a financial asset that has been extinguished and the consideration received is recognised in profit or loss. Recognition of financial liabilities Financial liabilities are initially recognised in the balance sheet at fair value when the Bank becomes a party to the contractual provisions of the instrument. Derecognition of financial liabilities Financial liabilities are removed from the balance sheet when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability that has been extinguished and the consideration paid is recognised in profit or loss. Modifications If the terms of a financial asset are renegotiated or otherwise modified (for example in forbearance measures), the Bank evaluates whether the cash flows of the modified asset are substantially different (in both qualitative and quantitative terms). If the cash flows are substantially different, then the contractual rights to cash flows from the original financial asset are deemed to have expired. In this case, the original financial asset is derecognised and a new financial asset is recognised at fair value plus any eligible transaction costs. Any fees received as part of the modification are accounted for as follows: • fees that are considered in determining the fair value of the new asset and fees that represent reimbursement of eligible transaction costs are included in the initial measurement of the asset; and • other fees are included in profit or loss as part of the gain or loss on derecognition. If cash flows are modified when the borrower is in financial difficulties, then the objective of the modification is usually to maximise recovery of the original contractual terms rather than to originate a new asset with substantially different terms. If the Bank plans to modify a financial asset in a way that would result in forgiveness of cash flows, then it first considers whether a portion of the asset should be written off before the modification takes place (see write-off policy). This approach impacts the result of the quantitative evaluation and means that the derecognition criteria are not usually met in such cases. 62
42. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements Significant accounting policies (continued) If the modification of a financial asset measured at amortised cost or FVOCI does not result in derecognition of the financial asset, then the Bank first recalculates the gross carrying amount of the financial asset using the original effective interest rate of the asset and recognises the resulting adjustment as a modification gain or loss in profit or loss. Any costs or fees incurred and fees received as part of the modification adjust the gross carrying amount of the modified financial asset and are amortised over the remaining term of the modified financial asset. Financial liabilities are derecognised when the liability has been settled, has expired or has been extinguished. An exchange of an existing financial liability for a new liability with the same lender on substantially different terms, qualitatively and quantitatively (a 10% difference in the present value of the cash flows) is accounted for as an extinguishment of the original financial liability and recognition of a new financial liability. The difference between the former amortised cost and the consideration paid is recognised in the income statement. Any subsequent resale is treated as a new issuance. Classification and measurement The Bank classifies its financial assets in the following measurement categories: - fair value (either through other comprehensive income, or through profit or loss), and - amortised cost. At initial recognition, the Bank measures a financial asset at its fair value plus, in the case of a financial asset measured at amortised cost or fair value through other comprehensive income, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss. Debt instruments The classification depends on the entity’s business model for managing the financial assets and the contractual terms of the cash flows at initial recognition. a) Business models Business models are classified as either Hold to Collect (HtC), Hold to Collect and Sell (HtC&S) or Other depending on how a portfolio of financial instruments as a whole is managed. GBI’s business models are based on the existing management structure of the bank, and refined based on an analysis of how businesses are evaluated and reported, how their specific business risks are managed and on historic and expected future sales. Sales are permissible in a HtC business model when these are due to an increase in credit risk, take place close to the maturity date, are insignificant in value (both individually and in aggregate) or are infrequent. The Bank reclassifies debt investments when and only when its business model for managing those assets changes. b) Assessing whether contractual cash flows are solely payments of principal and interest (SPPI test) The contractual cash flows of a financial asset are assessed to determine whether they represent SPPI. Interest includes consideration for the time value of money, credit risk and also consideration for liquidity risk and costs associated with holding the financial asset for a particular period of time. In addition, interest can include a profit margin that is consistent with a basic lending arrangement. In assessing whether the contractual cash flows are SPPI, GBI considers all contractual terms of the instrument. 63
43. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements Significant accounting policies (continued) Depending on the Bank’s business model for managing the asset and the cash flow characteristics of the asset (SPPI test), there are three measurement categories into which the Bank classifies its debt instruments: - - - Amortised Cost: Debt instruments that are held for collection of contractual cash flows under a HtC business model where those cash flows represent SPPI are measured at amortised cost. Any gain or loss arising on derecognition is recognised directly in profit or loss. Interest income from these financial assets is included in interest income using the effective interest rate method to the gross carrying amount of a financial asset (before any ECL allowance) except for credit impaired debtinstruments, in which case the effective interest rate method is applied to the amortised cost. Expected credit losses are presented as a separate line item in the statement of profit or loss. Fair value through other comprehensive income (FVOCI): Debt instruments that are held for collection of contractual cash flows and for selling the financial assets under a HtC&S business model, where the assets’ cash flows represent SPPI, are measured at FVOCI. Movements in the carrying amount are taken through OCI, except for the recognition of expected credit losses, interest revenue and foreign exchange gains and losses which are recognised in profit and loss. When the financial asset is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to profit or loss and recognised in other operating income. Interest income from these financial assets is included in interest income using the effective interest rate method to the gross carrying amount of a financial asset (before any ECL allowance) except for credit impaired debt instruments, in which case the amortised cost. Expected credit losses are presented as a separate line item in the statement of profit or loss. Fair value through profit or loss (FVTPL): Debt instruments that do not meet the criteria for amortised cost or FVOCI are measured at FVTPL. A gain or loss on a debt instrument is recognised in profit or loss and presented on a net basis within investment income in the period in which it arises. Interest income from these financial assets is included in interest income using the effective interest rate method. Equity instruments The Bank measures all equity investments at fair value with changes recognised in investment income in the statement of profit or loss as applicable. Derivatives Derivative contracts are measured at fair value through profit or loss, except for derivatives that are designated in a cash flow hedge. For those, the effective portion of changes in the fair value is recognized in equity. All derivatives in a net receivable position (positive fair value) are reported as trading assets. All derivatives in a net payable position (negative fair value) are reported as trading liabilities. Financial liabilities Financial liabilities, not being derivatives, are classified and subsequently measured at amortised cost. Expected credit losses of financial assets ECL models are applied to on-balance sheet financial assets accounted for at amortised cost and FVOCI such as loans and debt securities as well as off balance instruments including financial guarantees and loan commitments. Under the ECL model GBI calculates the ECL allowance, by considering the cash shortfalls it would incur in various default scenarios for prescribed future periods and multiplying the shortfalls by the probability of each scenario occurring. The LLP is the sum of these probability-weighted outcomes and the ECL estimates are unbiased and include supportable information about past events, current conditions, and forecasts of future economic conditions. GBI’s approach leverages on the existing credit risk models that are used within the scope of Foundation Internal Ratings Based (F-IRB) models 64
44. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements Significant accounting policies (continued) used for the calculation of the regulatory capital requirement. Those credit rating models have been modified to meet the requirements of IFRS 9. Three stage approach Financial assets are classified in any of the below 3 Stages at each reporting date. A financial asset can move between Stages during its lifetime. The Stages are based on changes in credit quality since initial recognition and defined as follows: • Stage 1: 12 month ECL: Financial assets that have not had a significant increase in credit risk since initial recognition (i.e. no Stage 2 or 3 triggers apply). Assets are classified as Stage 1 upon initial recognition (with the exception of purchased or originated credit impaired (POCI) assets) and a provision for ECL is made associated with the probability of default (PD) events occurring during the next 12 months (12 months ECL); • Stage 2: Lifetime ECL not credit impaired: Financial assets showing a significant increase in credit risk since initial recognition. A provision is made for the life time ECL representing losses over the life of the financial instrument (lifetime ECL) associated with the probability of default (PD) events occurring during the lifetime; or • Stage 3: Loans considered as credit impaired, require a provision that is based on lifetime ECL’s. Significant increase in credit risk A financial asset moves from Stage 1 to Stage 2 when there is a significant increase in credit risk (SICR) since initial recognition. GBI established a framework which incorporates quantitative and qualitative information to identify this on an asset level applying a relative assessment. Each financial asset is assessed at the reporting date on the triggers for significant deterioration. GBI assesses significant increase in credit risk using: • Quantitative indicators: change in the lifetime probability of default (both absolute and relative); • (Re)payment performance: loans with more than 30 days past due at the reporting date • Forbearance measures taken and the status thereof; • Qualitative assessment of the performance of the obligor. The change in lifetime probability of default is one of triggers for movement between Stage 1 and Stage 2. For exposures originated after 1 January 2018, the trigger compares lifetime probability of default at origination versus lifetime point in time probability of default at reporting date, considering the remaining maturity. For exposures originated before 2018 a comparison is made based on the ‘Through The Cycle’ PD’s (both current and origination) used for regulatory purposes. Assets can also return to Stage 1 if there is sufficient evidence that there has been a significant reduction in credit risk. Exposures with forbearance measures can be either performing (Stage 2) or non-performing (Stage 3). The Bank uses specific criteria to move forborne exposures from non-performing to performing and to remove the forbearance statuses that are consistent with the corresponding EBA Guidelines on the management of non-performing and forborne exposures. An exposure is reported as forborne for a minimum of two years. An additional one year probation period is observed for forborne exposures that move from non-performing back to performing. Credit impaired financial assets (Stage 3) Financial assets are assessed for credit-impairment at each reporting date and more frequently when circumstances warrant further assessment. Evidence of credit-impairment includes arrears of over 90 65
45. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements Significant accounting policies (continued) days on any material credit obligation, indications that the borrower is experiencing significant financial difficulty, a breach of contract, bankruptcy or distressed restructuring. An asset that is in stage 3 will move back to stage 2 when, as at the reporting date, it is no longer considered to be credit-impaired. The asset will migrate back to stage 1 when its credit risk at the reporting date is no longer considered to have increased significantly since initial recognition. Definition of default GBI has aligned the definition of credit impaired under IFRS 9 (Stage 3) with the definition of default for prudential purposes that stems from CRR article 178 on default of an obligor and the related EBA Guidelines thereon (Regulation (EU) No 575/2013). This is also the definition used for internal risk management purposes. Macroeconomic scenarios GBI has established a quarterly process whereby forward-looking macroeconomics scenarios and probability weightings are developed for ECL calculation purposes. GBI applies data from its parent company enriched with the internal views. A baseline, up-scenario and a down-scenario are determined to reflect an unbiased and probability-weighted ECL amount. As a baseline scenario, GBI applies the market-neutral view combining consensus forecasts for economic variables (e.g. GDP growth). Applying market consensus in the baseline scenario ensures unbiased estimates of the ECL’s. The alternative scenarios are based on observed events in the past. The probabilities assigned are based on the likelihoods of observing the three scenarios and are derived from confidence intervals on a probability distribution. The scenarios are reviewed on a quarterly basis. Measurement of ECL The Bank applies a collective assessment method to measure ECL for performing (Stage 1) and underperforming (Stage 2) assets, except for assets that are in Stage 2 due to qualitative factors. For those assets and all assets in Stage 3 an individual assessment method to calculate the ECL. a) Collectively assessed assets (Stage 1 and 2) For financial assets that are collectively assessed, GBI applies a model-based approach that calculates ECL in a formula that is expressed simplistically as PD x EAD x LGD, adjusted for the time value of money Probability of Default (PD): PD’s are assessed on the borrower level and refer to the likelihood that a borrower will default. The internal credit risk rating methodology is the basis on which the PD is calculated. The underlying internal rating models used for the corporate portfolio consider, amongst others, customer financial information and qualitative survey factors. PD’s calculated as the outcome of the rating models are then adjusted by the PD term structure models to estimate the point in time PD’s for the respective time period, i.e. 12 months or lifetime. Loss Given Default (LGD): If a loan default occurs, it represents the expected economic loss on the loan. It is expressed as a percentage. LGD calculations are performed using professional judgement, regulatory benchmarks used in capital requirement calculations and other external benchmarks for collateralized exposures due to the low number of internal historical observations. Exposure at Default (EAD): For cash loans, the expected outstanding balance at default corresponds to the amount of loan granted as of the reporting date plus expectations about future draw-downs. For commitments and contingencies, it is the value calculated through using credit conversion factors. Credit conversion factor corresponds to the factor, which adjusts the potential increase of the exposure between the current date and the default date. 66
46. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements Significant accounting policies (continued) With the exception of revolving facilities, the maximum period for which the credit losses are determined is the contractual life of a financial instrument unless there is the legal right to call it earlier. The ECL’s are discounted using: • the original effective interest rate for cash loans, • a discount rate that reflects the current market assessment of the time value of money and the risks that are specific to financial guarantee contracts or on loan commitments. b) Individually assessed assets (Stage 2) For individually significant financial assets that are in Stage 2 based on qualitative criteria, GBI estimates the ECL on an individual level at each reporting date and more frequently when circumstances warrant further assessment. Individual provisions are calculated using the discounted expected future cash flow method. To determine expected future cash flows, three or more scenarios are used. Each scenario is analysed based on the probability of occurrence and including forward looking information. The ECL is calculated as the probability weighted average of the shortfall (gross carrying amount minus discounted expected future cash flow using the original effective interest rate) per scenario. The scenarios are based on the Bank’s judgement regarding the magnitude and timing of recoveries. Recoveries can be from different sources including repayment of the loan, additional drawing, collateral recovery, asset sale etc. Cash flows from collateral and other credit enhancements are included in the measurement of the ECL’s of the related financial asset when it is part of or integral to the contractual terms of the financial asset and the credit enhancement is not recognised separately. The estimation of future cash flows are subject to significant estimation uncertainty and assumptions. c) Credit impaired financial assets (Stage 3) GBI estimates individual ECL allowance for credit impaired financial assets within Stage 3. Financial assets are assessed for credit-impairment at each reporting date and more frequently when circumstances warrant further assessment. Evidence of credit-impairment may include indications that the borrower is experiencing significant financial difficulty, a breach of contract, probability of bankruptcy or other financial reorganization, as well as a measurable decrease in the estimated future cash flows evidenced by the adverse changes in the payment status of the borrower or economic conditions that correlate with defaults. For Financial assets that are credit-impaired, the ECL calculation method is identical to the approach for individually assessed assets in Stage 2. When a financial asset is credit-impaired, interest ceases to be recognised on the regular accrual basis, which accrues income based on the gross carrying amount of the asset. Rather, interest income is calculated by applying the original effective interest rate to the amortised cost of the asset, which is the gross carrying amount less the related ECL allowance. d) Non-integral financial guarantee contracts The Bank assesses whether a financial guarantee contract held is an integral element of a financial asset that is accounted for as a component of that instrument or is a contract that is accounted for separately. The factors that the Bank considers when making this assessment include whether: • the guarantee is implicitly part of the contractual terms of the debt instrument; • the guarantee is required by laws and regulations that govern the contract of the debt instrument; • the guarantee is entered into at the same time as and in contemplation of the debt instrument; and 67
47. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements Significant accounting policies (continued) • the guarantee is given by the parent of the borrower or another company within the borrower’s group. If the Bank determines that the guarantee is an integral element of the financial asset, then any premium payable in connection with the initial recognition of the financial asset is treated as a transaction cost of acquiring it. The Bank considers the effect of the protection when measuring the fair value of the debt instrument and when measuring ECL. If the Bank determines that the guarantee is not an integral element of the debt instrument, then it recognises an asset representing any prepayment of guarantee premium and a right to compensation for credit losses. A prepaid premium asset is recognised only if the guaranteed exposure neither is credit-impaired nor has undergone a significant increase in credit risk when the guarantee is acquired. These assets are recognised in ‘other assets’. The Bank presents a gains or losses on a compensation right in profit or loss in the line item ‘expected credit losses on financial instruments’. Purchase or Originated Credit Impaired (POCI) assets POCI assets are financial assets that are credit-impaired on initial recognition. Impairment on a POCI asset is determined based on lifetime ECL from initial recognition. POCI assets are recognised initially at an amount net of impairments and are measured at amortised cost using a credit-adjusted effective interest rate. In subsequent periods any changes to the estimated lifetime ECL are recognised in the income statement. Favourable changes are recognised as an ECL gain, regardless whether the lifetime ECL at the reporting date is lower than the estimated lifetime ECL at origination. Write-off and debt forgiveness Loans and the related ECL are written off, either partially or in full, when there is no reasonable expectation of recovering a financial asset in its entirety or a portion thereof. This is generally the case when the Bank determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. This assessment is carried out at the individual asset level. When a loan is uncollectable, it is written off against the related ECL allowance. Subsequent recoveries of amounts previously written off are included in ‘expected credit losses on financial instruments’ in the statement of profit or loss. Financial assets that are written off could still be subject to enforcement activities in order to comply with the Bank’s procedures for recovery of amounts due. Changes in ECL Changes in ECL are recored in the statement of comprehensive income in the line item expected credit losses on financial instruments. Presentation of ECL allowance ECL allowances for financial assets measured at amortised cost are deducted from the gross carrying amount of the assets. For debt securities at FVOCI, the ECL allowance is recognised in OCI, instead of deducting the carrying amount of the asset. The ECL allowances related to off-balance sheet items are recorded under other liabilities. Financial guarantees A financial guarantee contract is a contract that requires the Bank to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument. A financial guarantee contract is recognised at the date that the Bank becomes a party to the irrevocable commitment and is recorded at face value under commitment and contingencies. Income from issued financial guarantees, and expenses 68
48. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements Significant accounting policies (continued) for bought financial guarantees, are amortised over the duration of the instruments and classified as “Fee and commission income” and “Fee and commission expense” respectively. The IFRS 9 ECL requirements apply to issued financial guarantee contracts that are not measured at fair value through profit or loss under IFRS 9 (see section expected credit loss on financial assets in this chapter). Cash and cash equivalents Cash and cash equivalents include notes and coins on hand, unrestricted balances held with central banks and highly liquid financial assets that are subject to an insignificant risk of changes in their fair value, and are readily available for use by GBI in the management of its short-term commitments. Cash and cash equivalents are carried at amortised cost in the statement of financial position. Fair values of financial assets and liabilities Fair value is defined as 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. It uses the assumptions that market participants would use and takes into account the characteristics of the asset or liability that market participants would take into account when pricing the asset or liability. Fair values of financial assets and liabilities are based on unadjusted quoted market prices where available. Such quoted market prices are primarily obtained from exchange prices for listed financial instruments. Where an exchange price is not available, quoted prices in an active market may be obtained from independent market vendors, brokers, or market makers. For certain financial assets and liabilities quoted market prices are not available. For these financial assets and liabilities, fair value is determined using valuation techniques. These valuation techniques range from discounting of cash flows to various valuation models, where relevant pricing factors including the market price of underlying reference instruments, market parameters (volatilities, correlations and credit ratings), and customer behaviour are taken into account. GBI maximises the use of market observable inputs and minimises the use of unobservable inputs in determining the fair value. Derivatives held for risk management purposes Derivatives held for risk management purposes are measured at fair value in the statement of financial position. The treatment for the changes in their fair value depends on their classification into the following categories: Cash flow hedge When a derivative is designated as a hedge of the variability in cash flows attributable to a particular risk associated with a recognized asset or liability or a highly probable forecast transaction that could affect the income, the effective portion of changes in the fair value of the derivative are recognized directly in other comprehensive income and presented in hedging reserve in equity. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in income. If the derivative expires or is sold, terminated, or exercised, or no longer meets the criteria for cash flow hedge accounting, or the designation is revoked, then hedge accounting is discontinued and the amount recognized in other comprehensive income and presented in the hedging reserve in equity remains there until the forecast transaction affects the income. If the forecast transaction is no longer expected to occur, then hedge accounting is discontinued and the balance in other comprehensive income is recognized immediately in income. 69
49. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements Significant accounting policies (continued) Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognized in income immediately, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. Hedge accounting is discontinued when the Bank revokes the hedging relationship, the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. The fair value adjustment to the carrying amount of the hedged item arising from the hedged risk is amortised to income from that date. Repurchase and resale agreements over investments The Bank enters into purchases of investments under agreements to resell (reverse repo) substantially identical investments at a certain date in the future at a fixed price. Investments purchased subject to commitments to resell them at future dates are not recognized. The amounts paid are recognized in loans to either banks or customers. The receivables are shown as collateralized by the underlying security. Investments sold under repurchase agreements (repo) continue to be recognized in the statement of financial position and are measured in accordance with the accounting policy for the related assets as appropriate. The proceeds from the sale of the investments are reported as “deposits from banks”, a liability account. Income and expenses arising from the repurchase and resale agreements over investments are recognized on an accrual basis over the period of the transactions and are included in interest income or expense. Items held in trust Assets, other than cash deposits, held by the Bank in fiduciary or agency capacities for its customers and government entities are not included in the accompanying statement of financial position, since such items are not under the ownership of the Bank. Taxes on income Taxes on income for the period comprise current taxes and deferred taxes. Current taxes on income comprises tax payable on the taxable income for the period, using tax rates enacted or substantively enacted at the reporting date, and; any adjustment in taxes payable for previous years. Deferred income tax is provided, using the statement of financial position method, on all taxable temporary differences arising between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax liabilities and assets are recognized when it is probable that the future economic benefits resulting from the reversal of temporary differences will flow to or from the Bank. A deferred tax asset is recognized to the extent that it is probable that future taxable profit will be available against which the deferred tax asset can be utilized. Currently, enacted tax rates are used to determine deferred taxes on income. The Bank offsets deferred tax assets and deferred tax liabilities if the Bank has a legally enforceable right to set off current tax assets against current tax liabilities and if the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority. Deferred taxes related to fair value remeasurement of financial assets measured at fair value through other comprehensive income and cash flow hedges, are charged or credited directly to OCI and subsequently recognized in income together with the deferred gains or losses that are realized. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part of the asset to be recovered. 70
50. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements Significant accounting policies (continued) Offsetting Financial assets and liabilities are offset and the net amount presented in the statement of financial position if, and only if there is a legally enforceable right to set off the amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only when permitted by the accounting standards, or for gains and losses from a group of similar transactions. Impairment of non-financial assets Non-financial assets are reviewed at each date of the statement of financial position to determine whether there is objective evidence of impairment. If any such indication exists, the asset’s recoverable amount is estimated in order to determine the extent of the impairment loss, if any. Income and expense recognition Interest income and expense Interest income and expense is recognized on an accrual basis by taking into account the effective interest of the asset or an applicable floating rate. Interest income and expense includes the amortization of any discount or premium or other differences between the initial carrying amount of an interest bearing instrument and its amount at maturity calculated on an effective interest rate basis. Fees received from the syndication loans purchased in the secondary markets or entered into in the primary markets are recorded as interest income as these are an integral part of the effective interest. Fees for the loans that are received by GBI is recorded as interest expense as these are an integral part of the effective interest. Fee and commission Fee and commission income and expenses that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. Other fees and commission income, including account servicing fees, investment management fees, sales commissions, placement fees and syndication fees, are recognized as the related services are performed. When a loan commitment is not expected to result in the draw-down of a loan, loan commitment fees are recognized on a straight-line basis over the commitment period. A contract with a customer that results in a recognised financial instrument in the Bank’s Financial statements may be partially in the scope of IFRS 9 and partially in the scope of IFRS 15. If this is the case, then the Bank first applies IFRS 9 to separate and measure the part of the contract that is in the scope of IFRS 9 and then applies IFRS 15 to the residual. Other fees and commission expense relates mainly to transaction and service fees, which are expensed as the services are received. Valuation results and net trading income Valuation results and net trading income includes gains and losses arising from derivatives and investments that are recorded at fair value through profit or loss. Investment income Investment income includes gains and losses arising from sales of investments that are recorded at fair value through other comprehensive income. 71
51. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements Significant accounting policies (continued) Employee benefits Below we provide a description of the most significant accounting policies relating to post-employment and other employee benefit commitments assumed by the employees in the Netherlands and the majority of staff employed outside the Netherlands. Short-term employee benefits Benefits for current active employees which are accrued and settled during the year and for which a provision is not required in the entity´s accounts. These include wages and salaries, social security charges and other personnel expenses. Costs are charged and recognized under the heading “Personnel expenses of the income statement. Post-employment benefits – Defined-contribution plans Pension plans have been established for the employees in the Netherlands and the majority of staff employed outside the Netherlands in accordance with the regulations and practices of the relevant countries. Third parties, mostly insurance companies, administer and execute these plans. GBI has no further payment obligations once the contributions have been paid. The contributions made to these plans are charged and recognized under the heading “Personnel expenses of the income statement. Share-based payment transactions BBVA shares granted by GBI to selected employees are treated as cash-settled share-based payment from GBI’s perspective. GBI recognises and measures the services received from Identified Staff that are subject to sharebased payment and the liability to pay for these services at the fair value of the liability. The fair value constitutes an estimate of the variable remuneration, taking into account market conditions. Once the BBVA shares are granted by the ultimate parent company to Identified Staff of GBI, the moneraty equivalent thereof (based on fair value at the time of granting the shares) is charged by BBVA to GBI. The fair value of the share-based payment is determined at the grant date. Any difference between this charge and estimated liability is recognized as a personnel expense in the income statement. The fair value of cash-settled share-based payment transactions are measured at each balance sheet date. Vesting conditions, other than market conditions, are not taken into account when estimating the fair value of the cash-settled share-based payment at the measurement date. Rights granted will remain valid until the expiry date, even if the share based payment scheme is discontinued Cash flow statement The statement of cash flows is prepared in accordance with the indirect method, classifying cash flows as cash flows from operating, investing and financing activities. In the net cash flow from operating activities, the result before tax is adjusted for those items in the statement of profit or loss and changes in items per the statement of financial position, which do not result in actual cash flows during the year. For the purposes of the statement of cash flows, cash and cash equivalents comprise balances with less than three months’ maturity from the date of acquisition, including cash and balances with central banks, treasury bills and other eligible bills, amounts due from other banks, and deposits from banks. Investments qualify as a cash equivalent if they are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Cash flows arising from foreign currency transactions are translated into the functional currency using the exchange rates at the date of the cash flows. 72
52. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements Significant accounting policies (continued) The difference between the net cash flow in accordance with the statement of cash flows and the change in Cash and cash equivalents in the statement of financial position is due to exchange rate differences and is accounted for separately as part of the reconciliation of the net cash flow and the change in Cash and cash equivalents in the statement of financial position. 73
53. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements Notes to the statement of financial position and statement of comprehensive income 1. Cash and cash equivalents Cash and cash equivalents include cash balances on hand, loans and advances to banks with original maturity periods of less than three months and other cash items. Cash and cash equivalents as of 31 December 2021 and 2020, included in the accompanying statements of cash flows are as follows: Unrestricted balances with central banks Loans and advances to banks Deposits from banks 2. 31 December 2021 31 December 2020 675,396 55,286 (28,588) 524,954 27,430 (62,201) 702,094 490,183 Related party disclosures For the purpose of this report, the 100 percent shareholder Türkiye Garanti Bankasi A.Ş. (GBI’s parent company), its controlling shareholder Banco Bilbao Vizcaya Argentaria S.A and all their subsidiaries and key management personnel (being the members of the Supervisory Board and Managing Board of GBI, TGB or BBVA) are referred to as related parties. In the course of conducting its banking business, the Bank engaged in various business transactions with its parent and other related parties. These transactions were carried out on commercial terms and at market rates. Transactions conducted with group companies are banking transactions including lending, borrowing funds, purchase and sale of financial assets, trade finance transactions and rendering international payment, derivative transactions and other banking services. The Bank had the following balances outstanding from and transactions with related parties. Transactions with the parent The outstanding balances and income and expense with the immediate parent and ultimate parent are as follows: 31 December 2021 31 December 2020 110,475 43,304 Deposits from banks Derivative financial instruments 27,408 6,392 8,403 10 Total liabilities 33,800 8,413 1,977 16,708 235,295 3,094 Loans and advances to banks Derivative financial instruments 110,460 15 Total assets Loan commitments, financial guarantees and other commitments Notional amount of derivatives 2021 Interest and similar income Interest and similar expense Fee and commission income Fee and commission expense Net income/expense 74 42,800 504 2020 2,105 (935) 1,267 (1,517) 1,167 (3,857) 394 (1,562) 920 (3,858)
54. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 2. Related party disclosures (continued) EUR 289 of ECL’s have been recorded against balances outstanding at year-end 2021 with the parent company (2020: EUR 125) and none of the exposures are credit impaired. Transactions with other related parties The outstanding balances and income and expense with BBVA group companies are as follows: 31 December 2021 31 December 2020 16,183 2,417 Deposits from banks Deposits from customers 1,052 4,740 Total liabilities 1,052 4,740 536 - - - 2021 2020 94 382 Loans and advances to banks Derivative financial instruments Loans and advances to customers 6 16,177 Total assets Loan commitments, financial guarantees and other commitments Notional amount of derivatives Interest and similar income Interest and similar expense Fee and commission income Other operating expenses 86 17 (9) Net income 29 2,388 327 (12) 85 (18) Various commission rates are applied to transactions involving guarantees and commitments. The pricing in transactions with the related parties is set on an arms-length basis. EUR 46 of ECL’s have been recorded against balances outstanding at year-end 2021 with other related parties (2020: EUR 7) and none of the exposures are credit impaired. Transactions with key management personnel Key management personnel compensation Key management personnel compensation comprises the remuneration of the Supervisory Board and Managing Board, which is disclosed in note 26. 75
55. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 2. Related party disclosures (continued) Key management personnel transactions The aggregate values of transactions and outstanding balances related to key management personnel were as follows. 31 December 2021 31 December 2020 Loans and advances to customers 5,250 4,794 Total assets 5,250 4,794 Deposits from customers 6,275 1,053 Total liabilities 6,275 1,053 20 - 20 - 2021 2020 218 190 Off Balance Sheet liabilities Notional amount of derivatives Interest and similar income Interest and similar expense Fee and commission income Fee and commission expense 64 (3) 157 - Net income 79 (2) 113 - As at 31 December 2021, the balances with key management personnel are allocated to Stage 1 and have a negligible ECL allowance (2020: negligible). During 2021 the expected credit loss that is recognised in profit or loss in respect of these balances is negligible as well (2020: negligible). 3. Cash and balances with central banks Cash at branches Balances with central banks ECL allowance 31 December 2021 31 December 2020 675,426 524,954 675,426 524,954 (30) (43) 675,396 524,911 Cash and balances with central banks includes cash on hand and all legal tenders, as well as demand deposits held at the central banks in countries in which GBI’s Head Office and its branch are located. Information about the ECL allowance of cash and balances with central banks, their credit quality and the company’s exposure to credit risk can be found in the Risk Management section under Credit Risk. The cash and balances with central banks are freely available since the average minimum reserve requirement was already met at 31 December 2021. 76
56. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 4. Loans and advances to banks Classification of financial assets as loans and advances to banks Loans and advances to banks are recorded at amortised cost and include the following financial instruments: 31 December 2021 31 December 2020 Bank placements (cash margins, deposits) Discounts to banks Reverse sale-and-repurchase agreements ECL allowance 59,733 538,354 25,759 (3,195) 27,437 472,118 157,237 (2,551) Net loans and advances to banks 620,651 654,241 The Bank placements include EUR 55 million (2020: EUR 27 million) of on-demand deposits. Expected credit loss and risk exposure Information about the ECL allowance of loans and advances to banks, their credit quality and the company’s exposure to credit risk can be found in the Risk Management section under Credit Risk. Total loans and advances to banks includes non-cash loans amounting to EUR 407 (31 December 2020: EUR 76) for letter of credits that the Bank has provided (note 15). 5. Loans and advances to customers Classification of financial assets as loans and advances to customers Outstanding loans and advances to customers are recorded at amortised cost and are categorised as follows: Non-financial corporations Non-bank financial corporations Households ECL allowance Non credit-impaired loans Credit-impaired loans ECL allowance 31 December 2021 31 December 2020 2,368,643 157,973 35,846 (27,249) 2,073,544 32,198 11,043 (24,271) 2,535,213 2,092,514 2,538,714 23,748 (27,249) 2,095,260 21,525 (24,271) 2,535,213 2,092,514 Expected credit loss and risk exposure Information about the ECL allowance of loans and advances to customers, their credit quality and the company’s exposure to credit risk can be found in the Risk Management section under Credit Risk. Total loans and advances to customers includes non-cash loans amounting to EUR 15,028 (31 December 2020: EUR 17,522) for letter of credits that the Bank has provided (note 15), for which the payment obligation is certain. 77
57. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 5. Loans and advances to customers (continued) Write-offs The Bank may write-off financial assets that might still be subject to enforcement activity. The outstanding contractual amounts of financial assets written-off during the year ended 31 December 2021 was EUR 402 thousand (2020: EUR 30.3 million). This includes amounts that are written off as a result of disposals as well as amounts that are owed in full by the Bank but which have been (partially) written-off due to no reasonable expectation of full recovery. 6. Financial assets mandatorily at fair value through profit or loss Financial assets mandatorily measured at fair value through profit or loss encompasses a receivable in relation to the sale of shares in 2020. Due to the contractual characteristics of this sale transaction, the receivable did not meet the criteria to be recognised as at amortised cost and hence it is required to be classified as at fair value through profit or loss. The equity shares that were sold related to one equity participation that results from the partial transition of debt into equity in relation to a debt restructuring. There are no financial assets designated as fair value through profit or loss by option. 7. Financial investments at fair value through other comprehensive income Financial instruments at fair value through other comprehensive income (FVOCI) comprise the following investments in listed bonds having solely payments of principal and interest: Bonds issued by financial corporations Bonds issued by non-financial corporations Bonds issued by central governments 31 December 2021 31 December 2020 44,887 50,902 154,409 17,144 22,338 63,291 250,198 102,773 Upon disposal of these debt investments, any balance within the OCI reserve for these debt investments is reclassified to profit or loss. Debt securities include securities pledged in relation tot ECB’s targeted longer term refinancing operation, DNB borrowing as well as repurchase transactions. Further information is disclosed in note 11 on deposits from banks and note 42 on asset encumbrance. 78
58. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 8. Property and equipment Movement in tangible assets from 1 January to 31 December 2021 is as follows: 01 January Additions Revaluation Disposals and transfers 31 December Cost Land and building Right of use building Furniture and equipment Right of use equipment 30,672 9 (1) (509) 30,171 943 106 - - 1,049 3,818 112 - (72) 3,858 265 62 - - 327 35,698 289 (1) (581) 35,405 (40) (521) - 509 (52) (460) (204) - - (664) (3,148) (332) - 65 (3,415) (145) (61) - - (206) (3,793) (1,118) - 574 (4,337) 31,905 (829) (1) (7) 31,068 Less: Accumulated depreciation Land and building Right of use building Furniture and equipment Right of use equipment Movement in tangible assets from 1 January to 31 December 2020 is as follows: 01 January Additions Revaluation Disposals and transfers 30,622 43 514 (507) 30,672 911 32 - - 943 3,701 132 - (15) 3,818 114 151 - - 265 35,348 358 514 (522) 35,698 - (547) - 507 (40) (250) (210) - - (460) (2,666) (495) - 13 (3,148) (89) (56) - - (145) (3,005) (1,308) - 520 (3,793) 32,343 (950) 514 (2) 31,905 31 December Cost Land and building Right of use building Furniture and equipment Right of use equipment Less: Accumulated depreciation Land and building Right of use building Furniture and equipment Right of use equipment 79
59. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 8. Property and equipment (continued) Depreciation expense of tangible assets for the year ended 31 December 2021 amounted to EUR 1,118 (2020: EUR 1,308). An independent valuator was involved to assess the valuation of the land and buildings. As per 31 December 2021 (the effective date of revaluation), the revaluation of land and buildings, net of deferred tax, amounting to EUR 1 was accounted under shareholders’ equity (2020: EUR 385). As of 31 December 2021, the net book value of property under cost model instead of revaluation model is EUR 15,729 (2020: EUR 15,699). The reconciliation of the revaluation surplus on the building is as follows: Opening balance as at 1 January 2021 10,689 2020 10,664 33 25 10,722 10,689 Current year charge in OCI Closing balance as at 31 December The revaluation surplus in OCI is part of a legal reserve as, under Dutch law, the balance cannot be distributed to the shareholder. 9. Intangible assets Movement in intangible assets from 1 January to 31 December 2021 is as follows: 01 January Cost Software Less: Accumulated depreciation Software Additions Disposals and transfers 31 December 12,558 1,773 (8) 14,323 12,558 1,773 (8) 14,323 (6,740) (2,193) 8 (8,925) (6,740) (2,193) 8 (8,925) 5,818 (420) - 5,398 Movement in intangible assets from 1 January to 31 December 2020 is as follows: 01 January Additions Disposals and transfers 31 December Cost Software Less: Accumulated depreciation Acquired software 10,206 2,352 - 12,588 10,206 2,352 - 12,588 (4,932) (1,808) - (6,740) (4,932) (1,808) - (6,740) 5,274 544 - 5,818 80
60. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 9. Intangible assets (continued) Internally generated software of EUR 2,268 is included in the total software (2020: EUR 2,728). In accordance with the Dutch Civil Code legal reserves have to be established equal to the carrying value of the internally developed software. The legal reserve cannot be distributed to the shareholder. 10. Other assets 31 December 2021 31 December 2020 1,262 311 1,189 4,326 1,573 5,515 Prepaid expenses, insurance claims and similar items Miscellaneous receivables As at 31 December 2020 EUR 3.9 million with regards to the Deposit Guarantee Scheme for the bankrupted DSB Bank was included under miscellaneous receivables. This amount was fully collected in 2021. 11. Deposits from banks GBI’s deposits from banks comprise the following element: On demand deposits Term deposits Obligations under repurchase agreements Central Bank borrowing Other deposits from banks 31 December 2021 31 December 2020 28,588 14,073 297,452 69,869 12,982 49,233 9,726 207,303 65,370 409,982 344,614 Obligations under repurchase agreements The Bank raises funds by selling financial instruments under agreements to repurchasing these instruments at the same price plus interest at a predetermined date. In note 42 further detail is provided in relation to the collateral provided. Central Bank borrowing: Targeted longer term refinancing operations In June 2020 and March 2021 the Bank raised funds by participating in respectively the 4th tranche and the 7th tranche of ECB’s third targeted longer term refinancing operations (TLTRO III) program that was announced on 22 July 2019. The funds are accounted for as financial liabilities in accordance with IFRS 9, which is further elaborated on the section significant accounting policies. The TLTRO III funding has a maturity of 3 years. The funding rate for these operations depends on the Bank’s eligible net lending, and can go as low as the average deposit facility rate of the ECB (currently -0.50%) over the life of the funding, plus an additional 50 basis points discount applied from 24 June 2020 to 23 June 2022 in order to provide attractive funding conditions that will support banks’ efforts to keep credit flowing to the real economy during the Covid pandemic. Hence, if the Bank reaches certain lending performance threshold over pre-defined reference periods, more favourable conditions as presented in the below table will be applied throughout the entire life of the operations. 81
61. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 11. Deposits from banks (continued) Reference period Performance threshold 1 March 2020 to 31 March 20211 0% From 24 June 2020 to 23 June 2021 the rate will be 50 basis points below the average interest rate on the deposit facility (currently 0.5%) prevailing over the same period, and in any case not higher than -1%. From 24 June 2021 onwards the average interest rate on the deposit facility over the life of the respective operation will apply. 1 October 2020 to 31 December 20212 0% From 24 June 2021 to 23 June 2022 the rate will be 50 basis points below the average interest rate on the deposit facility (currently 0.5%) prevailing over the same period, and in any case not higher than -1%. From 24 June 2022 onwards the average interest rate on the deposit facility over the life of the respective operation will apply. 1 April 2019 to 31 March 2021 1.15% If GBI did not reach the above performance thresholds , it is still entitled to favourable rates if the eligible net lending exceeds the benchmark net lending over the reference period. The rate applied to TLTRO III operations will be lower compared to the base rate, and can be as low as the average interest rate on the deposit facility prevailing over the life of the respective TLTRO III operation if the performance threshold is exceeded. Interest rate Due to the uncertainties in loan growth which might result in GBI’s ineligibility for those favorable conditions, the Bank has taken into account an interest of minus 50 basis points per prudentiality. The negative interest accrued in 2021 in relation to TLTRO III amounts to EUR 1,309 (2020: EUR 345) and is recognized as interest income. Additionally, in 2021, GBI met the eligibility criteria for the Special Reference Period (1 March 2020 to 31 March 2021), hence accounted a one-off interest income from the TLTRO operations, amounting to EUR 876. In note 42 further detail is provided in relation to the collateral provided. Other deposits from banks Loans and advances from banks and other institutions are recorded at amortised cost and comprise bilateral loans with a carrying amount of EUR 69,869 (2020: EUR 65,370). In connection to the Covid pandemic, on 30 April 2020 ECB recalibrated the targeted lending operations to further support real economy and introduced a special reference period to measure the lending performance for the application of favourable interest rates. 2 In connection to the Covid pandemic, on 10 December 2020 ECB prolonged the support via targeted lending operations for banks that lend to the real economy and introduced a second special reference period to measure the lending performance for the application of favourable interest rates. 1 82
62. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 12. Deposits from customers Deposits from customers comprise the following: Households Non-financial corporations Non-bank financial corporations Households Non-financial corporations Non-bank financial corporations Demand 31 December 2021 Time Total 1,102,723 416,769 757,987 563,777 1,860,710 980,546 64,642 128,924 193,566 1,587,134 1,450,688 3,037,822 Demand 31 December 2020 Time Total 1,252,849 267,135 661,736 242,964 1,914,585 510,099 3,296 16,477 19,773 1,523,280 921,177 2,444,457 From the deposits from customers EUR 1,767 million (2020: EUR 1,715 million) is guaranteed under the Deposit Guarantee Scheme. 13. Subordinated liabilities Subordinated liabilities concerned a subordinated loan received from GBI’s shareholder Türkiye Garanti Bankası A.Ş. with a total amount of EUR 50 million that was repaid in 2020. The loan was granted in 2015 with an original maturity of 10 years, callable five years after the issuance and had a yearly interest rate of 4.55%. The subordinated loan was subordinate to the other current and future liabilities of GBI. In 2020, the interest expense in respect of the subordinated loans amounts to EUR 2,002. 14. Taxation In the Netherlands, corporate income tax is levied at the rate of 15% (2020: 16,5%) for tax profits up to EUR 245 (2020: EUR 200) and 25% for the excess part over this amount on the worldwide income of resident companies, which is determined by modifying accounting income for certain exclusions and allowances for tax purposes for the related year. As per 2022 the corporate tax rate is 15% for tax profits up to EUR 395 and 25.8% for the excess part. As per 2022 tax losses can be carried forward indefinitely. However tax losses can only be fully deducted (on an annual basis) up to an amount of EUR 1,000 plus 50% of the taxable porofit that exceeds EUR 1,000. The corporate income tax rate for the Germany branch is 30%. 83
63. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 14. Taxation (continued) Tax assets and liabilities are as follows: 31 December 2021 31 December 2020 1,851 - 7,917 - 1,851 7,917 (3,711) (3,429) Tax liabilities (3,711) (3,429) Net tax assets/(liabilities) (1,860) 4,488 2021 2020 Current tax income/(expense) Deferred tax income/(expense) (6,376) - (2,625) 41 Tax income/(expense) (6,376) (2,584) Current tax asset Deferred tax asset Tax assets Current tax liability Deferred tax liability The tax income and expense are as follows: The movement of current tax asset/liability is as follows: Opening balance as at 1 January Current period taxation charge in the statement of profit or loss Current period taxation charge in the statement of other comprehensive income Movement from deferred to current tax Advance taxed paid during the period Corrections related to previous years Closing balance as at 31 December 2021 7,917 2020 8,557 (6,378) (2,625) 19 (409) 51 291 (49) 16 2,390 (12) 1,851 7,917 In accordance with the related regulation for prepaid taxes on income, such advance payments during the year are being deducted from the final tax liability for the period. Accordingly, the taxation charge on income is not equal to the final tax liability appearing on the statement of financial position. 84
64. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 14. Taxation (continued) Deferred tax assets and liabilities are as follows: 31 December 2021 31 December 2020 56 94 356 94 150 450 Revaluation of building Other (3,708) (154) (3,725) (154) Total deferred tax liabilities (3,861) (3,879) Net deferred tax assets/(liabilities) (3,711) (3,429) Valuation of hedges Valuation of (in)tangible fixed assets Total deferred tax assets Movements in deferred tax assets and liabilities are detailed in the table below: Opening balance as at 1 January Movement from deferred to current tax Deferred tax benefit recognized in the statement of profit or loss Deferred tax charge recognized in the statement of other comprehensive income Deferred tax benefit recognized in the statement of other comprehensive income Closing balance ast at 31 December 2021 (3,429) 2020 (2,690) (51) (16) - 41 (231) (764) - - (3,711) (3,429) The total provision for taxes on income is different than the amount computed by applying the Dutch statutory tax rate to income before provision for taxes as shown in the following reconciliation: 2021 2020 Profit before tax 24,387 9,388 Tax using the GBI’s domestic tax rate Effect of different tax rates in other countries Disallowable expenses Changes related to previous years taxation (6,078) (23) (226) (49) (2,347) (28) (246) (4) Tax income/(expense) (6,376) (2,625) Effective tax rate 26.15% 28.0% 85
65. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 15. Other liabilities The principal components of other liabilities are as follows: Non-cash loans for letter of credits (*) Unearned income Short-term employee benefits Withholding taxes Vacation pay liability Accrued expenses Payables to suppliers Miscellaneous payables Lease liabilities ECL for non-cash loans (note 31) 31 December 2021 31 December 2020 15,435 2,334 1,351 658 93 3,283 1,799 5,600 505 583 16,363 2,044 1,355 165 100 2,325 873 2,985 604 684 31,641 27,498 * The Bank gives non-cash loans for letter of credits it provides. As of 31 December 2021, non-cash loans provided to banks and customers are EUR 407 (note 4) and EUR 15,028 (note 5), respectively (31 December 2020: EUR 76 and EUR 17,522). Management recorded a provision in relation to other long term employee benefits (variable remuneration). Part thereof is to be paid within 12 months after the reporting date and the remainder is deferred and to be paid more than 12 months after the reporting date. The amount of provision that is set aside in relation to variable remuneration is based on the actual performance versus the budgets and is approved by the Supervisory Board. The amount set aside for termination benefits is based on management judgement (or Supervisory Board judgement in case of termination of member of the Managing Board) in relation to negotiations between parties involved. 16. Equity Share capital As of 31 December 2021, the authorized nominal share capital of the Bank amounts to EUR 500 thousand and is subdivided into 500,000 shares with a nominal value of EUR 1 each, of which 136,836 shares have been issued and fully paid-in. No changes occurred in 2021. Other reserves Components of the other resrves are as follows: 2021 2020 Fair value reserve investments Hedging reserve Other legal reserves Revaluation of building Legal reserve of internally generated software 33 (163) 91 (1,067) 10,722 2,268 10,689 2,728 Closing balance as at 31 December 12,860 12,441 86
66. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 16. Equity (continued) Other comprehensive income/loss that will not to be reclassified to profit or loss in subsequent periods: • Revaluation of building: In line with the applicable accounting policy, the Bank performs an annual revaluation of the office building that is reported under buildings in tangible assets (note 8). Under this policy, the revaluation surplus is recognized in the other comprehensive income and shall not be recycled to the statement of profit or loss in the subsequent periods. The reconciliation of revaluation reserve in other comprehensive income (net of tax) are as follows: Opening balance as at 1 January Gains/(losses) during the year Deferred tax effect Closing balance as at 31 December • 2021 10,689 2020 10,664 45 (12) 33 (8) 10,722 10,689 Legal reserve for internally generated software In accordance with the Dutch Civil Code legal reserves have to be established equal to the carrying value of the internally developed software. The movement of the legal reserve for internally generated software are as follows: Opening balance as at 1 January 2021 2,728 2020 2,144 Movement from/ to retained earnings (460) 584 Closing balance as at 31 December 2,268 2,728 Other comprehensive income/(loss) to are or may be reclassified to profit or loss in subsequent periods: • Financial assets at fair value through other comprehensive income reserve (FVOCI) is detailed as follows: • In 2021, the Bank recognises changes between the amortised cost and market value of the securities measured at fair value through other comprehensive income in the other comprehensive income. • These changes are accumulated within the FVOCI reserve under equity. The Bank transfers amounts from this reserve to retained earnings when the relevant equity securities are derecognised. Opening balance at 1 January 2021 91 2020 (1,135) Gains/(losses) during the year (184) 1,415 107 219 19 (409) - 1 33 91 Change in ECL Income tax effect Other Closing balance as at 31 December 87
67. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 16. Equity (continued) • Cashflow hedge reserve The hedging reserve comprises the effective portions of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred (refer to note 40 ‘Derivatives and Hedge Accounting’ for the details). 2021 (1,067) 2020 (1,893) Effective portion of changes in fair value Reclassified to profit or loss Deferred tax effect 940 264 (300) 59 1,042 (275) Closing balance as at 31 December (163) (1,067) Opening balance as at 1 January In accordance with the Dutch Civil Code legal reserves have to be established in relation to the revaluation surplus on the building, cash flow hedging reserve, fair value through other comprehensive income (FVOCI) reserve and the legal reserve for internally generated software. Total Legal reserves amounts to EUR 12,860 (2020: EUR 12,441) and are not available for distribution to the Company’s shareholders. Capital management GBI is part of the BBVA Group. Therefore the European Central Bank (ECB) sets and monitors capital requirements for the Group as a whole and for GBI individually. The banking operations are directly supervised by De Nederlandsche Bank (DNB). The standards applied for the capital requirements are based on the Capital Requirements Directive (CRD IV) and Capital Requirements Regulation (CRR) of the European Union. In accordance with the CRR, the Bank is using the Foundation Internal Rating Based (F-IRB) approach to calculate the regulatory capital ratios. These ratios compare GBI’s total capital and Common Equity Tier 1 (CET1) with the required pillar I capital for credit risk (based on the total of risk-weighted assets and off-balance sheet items), the market risk associated with the trading portfolios and the operational risk. GBI’s regulatory capital consists of the sum of the following elements. • Common Equity Tier 1 (CET1) capital, which includes ordinary share capital, related share premiums, retained earnings and reserves after adjustment for dividends proposed after the year end and deductions for goodwill, intangible assets and other regulatory adjustments relating to items that are included in equity but are treated differently for capital adequacy purposes. • Tier 2 capital, which includes other Tier 2 capital elements. 88
68. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 16. Equity (continued) The following table analyzes actual capital in accordance with regulatory requirements: Total Equity Prudential filters Prudent valuation IRB shortfall of credit risk adjustments to ECL Intangible assets3 Core Tier 1 Perpetual Tier 1 capital Transitional adjustments to AT1 Capital Additional Tier 1 Total Tier I capital IRB Provision Excess Subordinated capital Total Tier II capital 31 December, 2021 591,018 (114) 31 December, 2020 583,376 958 (114) (1,447) (4,033) 958 (4,349) 585,423 579,985 - - 585,423 579,985 3,566 - 907 - 588,990 580,892 21.69% 21.83% 23.84% 23.88% 3,566 Total own funds CET 1 ratio Total Capital Ratio (TCR) 907 The Common Equity Tier 1 (CET1) ratio and Total Capital Ratio (TCR) does not include the 2021 net result, in line with the reports submitted to the regulatory authorities. When including the audited full year net result of 2021 the CET1 ratio is 22.36 percent (2020: 24.12 percent) and the TCR is 22.49 percent (2020: 24.16 percent). GBI has preserved its prudent approach to capital and liquidity management in 2021. CET1 has slightly decreased to 21.69 percent from 23.84 percent in 2020, whereas the total capital ratio has decreased to 21.83 percent from 23.88 percent in 2020, in parallel to increase in the loan book. Both ratios are comfortably above the minimum required regulatory levels and provides a strong cushion for the Bank. As part of the annual Supervisory Review and Evaluation Process (SREP), the regulatory authority sets individual capital guidance for GBI in excess of the minimum capital resources requirement. A key input to the SREP is GBI’s internal capital adequacy assessment process (ICAAP). GBI’s policy is to maintain a strong capital base to maintain investor, creditor and market confidence and to sustain the future development of the business. The impact of the level of capital on shareholders’ returns is also recognised and the Group recognises the need to maintain a balance between the higher returns that might be possible with greater earning and the advantages and security afforded by a stronger capital position. The policies in respect of capital management and allocation are reviewed regularly by the Supervisory Board. Management uses regulatory capital ratios to monitor its capital base. Return on risk-adjusted capital is monitored to assess whether the allocation of the capital is in line with the risk appetite and the long term objectives of the Bank. 3 Under CRD IV regulation, additional items listed below shall be deducted fully by 31 December 2020 to enhance own funds quality: Non-eligible minority interest, Other intangible asset (Non-solvency deductible under Basel II framework) and Deferred tax assets that rely on future profitability and do not arise from temporary differences 89
69. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 17. Fair value information 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 estimated fair values of financial instruments have been determined using available market information by the Bank. In case market information is unavailable the Bank applies appropriate valuation methodologies for fair value determination. However, judgment is necessarily required to interpret market data to determine the estimated fair value. While management uses available market information in estimating the fair values of financial instruments, the market information may not be fully reflective of the value that could be realized in the current circumstances. The Bank analyses financial instruments held at fair value in the three categories described below. Fair values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows. The fair value hierarchy gives the highest priority to (unadjusted) quoted prices in active markets for identical assets or liabilities and the lowest priority to valuation techniques supported by unobservable inputs. Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities, Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices), Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). If the inputs used to measure the fair value of an asset or a liability fall into different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. The Bank recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred. 90
70. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 17. Fair value information (continued) Financial assets and liabilities measured at fair value The table below analyses financial instruments carried at fair value, by valuation method: 31 December 2021 Level 1 Level 2 Level 3 Valuation Valuation Quoted prices techniques techniques(unadjusted) in significant observable active markets unobservable inputs inputs Total Financial assets measured at fair value Derivative financial assets Trading derivatives - 5,128 - 5,128 Non-trading derivatives - 3,116 - 3,116 - 284 - 284 44,887 - - 44,887 Financial investments at fair value through profit or loss Financial investments at fair value through other comprehensive income Financial corporations Non-financial corporations Central governments 50,902 - - 50,902 154,410 - - 154,410 Total 250,199 8,528 - 258,727 Trading derivatives - 5,041 - 5,041 Non-trading derivatives - 21,914 - 21,914 - 26,955 - 26,955 Financial liabilities measured at fair value Derivative financial liabilities Total 91
71. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 17. Fair value information (continued) 31 December 2020 Level 1 Quoted prices (unadjusted) in active markets Level 2 Valuation techniques observable inputs Level 3 Valuation techniques significant unobservable inputs Total Financial assets measured at fair value Derivative financial assets Trading derivatives - 2,551 - 2,551 Non-trading derivatives - 1,714 - 1,714 - 317 - 317 17,144 - - 17,144 21,249 1,089 - 22,338 63,291 - - 63,291 101,684 5,671 - 107,355 Trading derivatives - 1,531 - 1,531 Non-trading derivatives - 7,772 - 7,772 - 9,303 - 9,303 Financial investments at fair value through profit or loss Financial investments at fair value through other comprehensive income Financial corporations Non-financial corporations Central governments Total Financial liabilities measured at fair value Derivative financial liabilities Total The equity investment that was categorised as level 3 (see note 6) was sold in 2020 and it was agreed to pay the purchase price in instalments. The final instalment was paid in June 2021. The remaining instalment is classified as level 2 in 2020 since the agreed purchase price is considered as an observable input. In 2021 no significant transfers occurred between Level 1 and Level 2 in 2021 and 2020. There were no significant changes in the valuation techniques during 2021 and 2020. The following table shows a reconciliation from the beginning balances to the ending balances for fair value measurements in Level 3 of the fair value hierarchy. 31 December, 2021 - Balance as at January 1st Transfer in/(out of) level 3 Disposal Gains/(losses) in the statement of profit or loss Closing as at December 31st 92 31 December, 2020 1,463 (317) (565) (581) -
72. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 17. Fair value information (continued) Financial assets and liabilities not measured at fair value The bank assessed that cash and short-term deposits, trade receivables, trade payables, bank overdrafts and other current liabilities approximate their carrying amounts largely due to the shortterm maturities of these instruments. The fair value of the financial assets and liabilities is included at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The following methods and assumptions were used to estimate the fair values: 31 December 2021 Assets for which fair values are disclosed but not recognised at fair value: Loans and advances to banks Loans and advances to customers Total Liabilities for which fair values are disclosed but not recognised at fair value: Deposits from banks Deposits from customers Total Carrying value Level 1 Level 2 Level 3 Quoted prices (unadjusted) in active markets Valuation techniques observable inputs Valuation techniques significant unobservable inputs 620,651 - - 629,808 629,808 2,535,213 - - 2,584,332 2,584,332 3,155,864 - - 3,214,140 3,214,140 409,982 - - 414,358 414,358 2,590,159 - - 2,602,883 2,602,883 3,000,141 - - 3,017,241 3,017,241 93 Total
73. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 17. Fair value information (continued) 31 December 2020 Carrying value Level 1 Level 2 Level 3 Total Quoted prices (unadjusted) in active markets Valuation techniques observable inputs Valuation techniques significant unobservable inputs 6254,241 - - 661,116 661,116 Loans and advances to customers 2,092,514 - - 2,139,478 2,139,478 Total 2,746,755 - - 2,800,495 2,800,495 344,614 - - 346,903 346,903 2,148,677 - - 2,162,731 2,162,731 2,493,291 - - 2,509,634 2,509,634 Assets for which fair values are disclosed but not recognised at fair value: Loans and advances to banks Liabilities for which fair values are disclosed but not recognised at fair value: Deposits from banks Deposits from customers Total Non-interest bearing deposits and cash are excluded from the table as it’s carrying value approximates the fair value. For deposits and loans with maturity, the fair values are estimated using discounted cash flows, applying current rates offered for deposits of similar remaining maturities. Unobservable inputs mainly relates to discount rates including credit spread. 18. Commitments and contingencies In the ordinary course of business, the Bank undertakes various commitments and incurs certain contingent liabilities that are not presented in the accompanying financial statements, including letters of guarantee and letters of credit. Commitments and contingent liabilities comprise the following: Letters of credit Commitments for loan granting Letters of guarantee Other guarantees 31 December 2021 31 December 2020 285,676 95,322 32,319 6,722 362,580 170,920 24,485 680 420,039 558,665 Most of the contingencies have a short term nature and any outflow is normaly reimbursed by the clients of the bank. Letters of credit mainly secure payments to third parties for a customer’s foreign and domestic trade transactions in order to finance a shipment of goods. GBI’s credit risk in these transactions is limited since these transactions evolve with the shipment of physical commodities shipped and are of a short duration. Commitments for loan granting mainly relate to the regular lending activities of the bank. 94
74. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 18. Commitments and contingencies (continued) Guarantees relate both to credit (other guarantees) and non-credit substitute guarantees (letters of guarantee). Many of them are expected to expire without being drawn on and therefore do not necessarily represent future cash outflows. 19. Net interest income Interest income and expense from various products of the Bank and the transactions engaged are as follows: 2021 2020 Interest loans to customers Interest on securities Interest on loans to banks Negative interest on liabilities 62,032 258 8,911 2,213 66,118 1,709 7,880 606 Total interest income using effective interest method 73,414 76,313 Interest on deposits from banks Interest on deposits from customers Interest on subordinated liabilities Negative interest on assets (989) (5,756) (3,127) (126) (9,198) (2,002) (3,008) (9,872) (14,334) Other interest expense (swap funding costs) (10,421) (15,086) Total interest expense (20,293) (29,420) 53,121 46,893 Total interest expense using effective interest method Net interest income 20. Net fee and commission income Disaggregation of fee and commission income Fees and commissions the Bank charges and incurs due to the transaction engaged are as follows: 2021 2020 Commissions on documentary credits and non-cash loans Brokerage and advisory fees Custody fees Commissions on account maintenance Commissions on funds transfers Other fees and commissions 13,300 1,688 1,333 2,375 1,754 495 6,984 2,309 1,035 1,617 1,340 10 Total fee and commission income 20,945 13,295 Commissions on documentary credits and non-cash loans Brokerage and custody fees Commmissons and fees paid on foreign correspondents Corporate banking fees Other fees and commissions (1,060) (407) (358) (1,486) (240) (16) (382) (388) (1,391) (176) Total fee and commission expense (3,551) (2,353) Net fee and commission income 17,394 10,942 95
75. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 20. Net fee and commission income (continued) Contract balances The following table provides information about receivables and contract liabilities from contracts with customers. 31 December 2021 31 December 2020 2,334 2,044 Receivables included in miscellaneous receivables (note 10) Contract liabilities included in other liabilities (note 15) The contract liabilities mainly relate to the fees received from customers in relation to retail and corporate banking services. This is recognised as revenue over the period for which the services are provided. The amount of EUR 1,986 recognised in contract liabilities at the beginning of the period has been recognised as revenue for the period ended 31 December 2021. The remaining part will be accrued in 2022. Performance obligations and revenue recognition policies Fee and commission income from contracts with customers is measured based on the consideration specified in a contract with a customer. GBI recognises revenue when it transfers control over a service to a customer. The following table provides information about the nature and timing of the satisfaction of performance obligations in contracts with customers, including significant payment terms, and the related revenue recognition policies. Type of service Nature and timing of satisfaction of performance obligations, including significant payment terms Revenue recognition under IFRS 15 Retail and corporate banking service GBI provides banking services to retail and corporate customers, including account management, provision of overdraft facilities, brokerage of securities, brokerage of spot foreign exchange, brokerage of derivatives, custody of services, security transfers, third party funds, and servicing fees. Revenue from account service and servicing fees is recognised over time as the services are provided. Fees for ongoing account management are charged to the customer’s account on a monthly basis. GBI sets the rates separately for retail and corporate banking customers at least on an annual basis. Revenue related to transactions is recognised at the point in time when the transaction takes place. Transaction-based fees for interchange, foreign currency transactions and overdrafts are charged to the customer’s account when the transaction takes place. Trade Finance Servicing fees are charged on a monthly basis and are based on fixed rates reviewed at least annually by the Bank. GBI provides trade finance services to its corporate customers which include letters of credit, standby letters of credit, collection, letters of guarantee The type of services is transaction based and are charged when the transaction takes place. 96 Revenue from account service and servicing fees is recognised as the services are provided.
76. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 21. Valuation results and net trading income Gains and losses from derivative financial instruments and changes in fair value of other trading instruments are reflected in net trading income including the fair value hedges, whereas gains and losses arising from changes in the effective portion of the fair value of cash flow hedges are reflected as a separate component of equity. Net trading income from trading of financial assets is detailed in the table below: 22. Derivatives trading results Securities trading results Change in fair value of derivatives relating to fair value hedges Change in fair value of derivatives relating to cashflow hedges (ineffective portion) Change in the fair value of hedged items Foreign exchange transaction results Valuation results and net trading income 2021 2020 701 (84) 773 (583) 788 (203) (2) 14 (878) 1,896 212 1,658 2,421 1,871 Investment income GBI has not disposed debt instruments measured at FVOCI (2020: EUR 0). 23. Other income and expenses The other income and expenses represent contributions to the Deposit Guarantee Scheme (DGS) and National Resolution Fund (NRF) as well as gains or losses arising from the derecognition of financial assets measured at amortised cost where the purchase price deviates from the carrying value. Total contributions for 2021 amounted to EUR 3.4 million (2020: EUR 3.4 million). 24. Other operating expenses Operating expenses of the Bank is as follows: Electronic data processing Audit & consultancy Communication Supervisory fees Insurance Utility Advertising Repair and maintenance Stationary Others 2021 2020 5,455 1,714 1,213 1,317 362 308 167 38 57 294 4,886 2,061 1,377 1,219 296 262 120 60 51 456 10,925 10,788 Audit and consultancy expenses include expenses related to services provided by BDO Audit & Assurance B.V. (2020: KPMG Accountants N.V.) as external auditor of GBI and other members of the international BDO network. 97
77. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 24. Other operating expenses (continued) The breakdown, in which these expenses have been allocated to the relevant period, is as follows: 2021 2020 BDO Audit & Assurance B.V. Other BDO network Total BDO network KPMG Accountants N.V. Other KPMG network Total KPMG network 446 - 446 354 12 366 287 - - 287 - 418 - - 418 - - - - - - - 733 - 733 772 12 784 Statutory audit of financial statements Other assurance services Tax advisory services Other non-audit services For the period to which our statutory audit relates, in addition to this audit, BDO has provided the following services to the GarantiBank International N.V.: • • 25. audit and review of financial information for consolidation purposes of the parent company; audit and audit-related services on prudential returns and other regulatory reporting to Supervisory Authorities. Personnel expenses Short-term benefits - salaries Short-term benefits - social security and insurance Short-term benefits - other Other benefits Post employment benefits (pension insurance premium) Termination benefits 26. 2021 2020 18,994 2,283 906 879 2,573 691 19,625 2,474 715 630 2,726 600 26,326 26,770 Board remuneration In accordance with the Articles of Association, the remuneration of the members of the Managing Board is subject for approval by the shareholder at the Annual General Shareholders’ Meeting. The remuneration proposal for the members of the Managing Board will be submitted to the next Annual General Shareholders’ Meeting in 2022 for adoption. The objective of the remuneration policy is to attract, motivate and retain a qualified Managing Board with an international mind-set and background. The remuneration of current and former members of the Managing Board amounted to EUR 2,077 in 2021 (2020: EUR 1,924). The total remuneration consists of: short-term benefits post-employment benefits other long-term employee benefits termination benefits 98 2021 2020 1,927 150 - 1,776 148 - 2,077 1,924
78. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 26. Board remuneration (continued) The remuneration of current and former independent members of the Supervisory Board amounted to EUR 156 in 2021 (2020: EUR 174). The non-independent (current and former) members of the Supervisory Board did not receive remuneration. For further details regarding the remuneration, policy reference is made to the Report of the Supervisory Board. In Note 2 Related party disclosures, contracts transacted with key management personel including the managing board is disclosed and is extenstion of this note. See also Note 27 Share-based payments. 27. Share-based payments Selected employees of GBI are marked as Identified Staff by the ultimate parent company (BBVA) under its remuneration policy. Consequently, the variable compensation generated by the Identified Staff of GBI is subject to the settlement and payment scheme as laid down in the remuneration policy. The main features of this scheme are: • • • • • • • • • A significant percentage of variable remuneration – 60% in the case of Identified Staff members with particularly high variable remuneration (> EUR 500), and 40% for the rest of the Identified Staff– shall be deferred over a three-year period. 50% of the variable remuneration of each year (including both upfront and deferred portions), shall be established in BBVA shares. The variable remuneration will be subject to ex ante adjustments, so that it will not be accrued, or will be accrued in a reduced amount, should a certain level of profit or capital ratio not be obtained. Likewise, the Annual Variable Remuneration will be reduced upon performance assessment in the event of negative evolution of the Bank’s results or other parameters such as the level of achievement of budgeted targets. The deferred component of the variable remuneration (in shares and in cash) may be reduced in its entirety, yet not increased, based on the result of multi-year performance indicators aligned with the Bank’s fundamental risk management and control metrics, related to the solvency, capital, liquidity, funding or profitability, or to the share performance and recurring results of the Group. During the entire deferral period and retention period, variable remuneration shall be subject to malus and clawback arrangements, both linked to a downturn in financial performance of the Bank, specific unit or area, or individual, under certain circumstances. All shares shall be withheld for a period of one year after delivery, except for those shares required to honor the payment of taxes. No personal hedging strategies or insurance may be used in connection with remuneration and responsibility that may undermine the effects of alignment with sound risk management. The deferred amounts in cash subject to multi-year performance indicators that are finally paid shall be subject to updating, in the terms determined by the Bank’s Board of Directors, upon proposal of the Remunerations Committee, whereas deferred amounts in shares shall not be updated. Finally, the variable component of the remuneration of the Identified Staff members shall be limited to a maximum amount of 100% of the fixed component of total remuneration, unless the General Meeting resolves to increase this percentage up to 200% (due to local regulation in The Netherlands, the maximum amount is capped at 20% of the fixed component of total remuneration. As part of the variable remuneration granted for 2017 to Identified Staff, a number of 1,612 shares corresponding to the initial payment were delivered to the beneficiaries in 2018. The deferred portion of the variable remuneration granted for 2017 constitutes 1,074 shares have been settled in 2021. 99
79. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 28. Leases The Bank leases certain properties in The Netherlands (meeting rooms and parking), Germany (Branch office) and Turkey (Representative Office) as well as cars and other office equipment. Lease payments are recognized upon renewal of the lease contracts and presented under other liabilities. Interest in connection with lease payments are presented under interest expenses. Some leases provide for additional rent payments that are based on changes in certain price indices. Information about leases for which the Bank is a lessee is presented below. Right-of-use assets Right-of-use assets are presented within tangible. Opening balance as at 1 January 2021 Property 483 Equipment 120 Total 603 (204) 106 - (61) 62 - (265) 168 - 385 121 506 Property 661 Equipment 25 Total 686 (210) 32 - (56) 151 - (266) 183 - 483 120 603 Depreciation charge for the year Additions to the right-of-use assets Derecognition of right-of-use assets Closing balance as at 31 December 2021 Opening balance as at 1 January 2020 Depreciation charge for the year Additions to the right-of-use assets Derecognition of right-of-use assets Closing balance as at 31 December 2020 100
80. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements Risk Management Introduction GBI has an overall risk management model tailored to its business and its organization. This model allows GBI to develop its activity in accordance with the risk strategy, risk controls and management policies defined by the governing bodies of the Bank and to adapt to a changing economic and regulatory environment. GBI follows a clear and proactive risk management strategy and adjusts its risk management structure continuously in an effort to further align with BBVA. Given BBVA’s stake in Türkiye Garanti Bankasi A.Ş., GBI’s shareholder, GBI is also qualified as a significant supervised entity under the Single Supervisory Mechanism (SSM). Since then, the alignment of risk management policies and practices with those of BBVA has been concluded. GBI has preserved its prudent approach to capital and liquidity management in 2021 Common Equity Tier 1 (CET1) has slightly decreased to 21.69 percent from 23.84 percent in 2020, whereas the total capital ratio has decreased to 21.83 percent from 23.88 percent in 2020. Both ratios are comfortably above the minimum required regulatory levels and provide a strong cushion for the Bank.. The Bank has continued to operate with a significant liquidity buffer, evidenced by a high LCR of 516.9 percent. The liquidity buffer is composed of placements to European Central Bank and investments in high quality liquid assets. 29. Overview on Governance Around Risk GBI has established a governance structure based on the segregation of duties to facilitate sound and controlled business operations. Risk management is structured at various levels within the organization in the form of various committees at the Supervisory Board and at the Managing Board levels and dedicated departments with specific mandates for risk management and control. The Supervisory Board (SB) bears the overall responsibility for approving the risk appetite of GBI and monitoring of the adherence thereto. The Risk Committee of the Supervisory Board (RCSB) advises and assists the Supervisory Board in monitoring the Bank’s risk profile, risk appetite and effective risk management. The Audit and Compliance Committee of the Supervisory Board (ACSB) is the ultimate authority on independent audit functions, compliance-related risks, and advises the SB in monitoring the integrity of the financial statements and compliance with legal and regulatory requirements. The Managing Board (MB) of GBI functions as a collegial body, as referred to in Section 2:129 of the Dutch Civil Code that reports to the SB. The MB is responsible for the management, general affairs, and business connected with GBI. The MB develops strategies, policies, and procedures to establish effective risk management and ensure that the Bank is in line with the approved risk appetite. CRO, as a member of the MB, is responsible for developing, implementing, and monitoring the effectiveness of risk policies and practices that strategically support the Bank's risk objectives. The Risk Management Committee (RMC) is responsible for coordinating and monitoring risk management activities at the Bank level. Other committees at the Bank level manage specific key banking risks: the Credit Committee for credit risk; the Asset and Liability Committee (ALCO) for market, interest rate, and liquidity risks; and the Compliance Committee for compliance risks. The Operational Risk Admission and Product Governance Committee is responsible for the assessment and introduction of new products and services. The Credit Division is a separate risk control function, independent of commercial activities, ensuring the proper functioning of the Bank’s credit processes. 101
81. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 29. Overview on Governance Around Risk (continued) The Risk Management Department (RMD) of GBI is an independent risk monitoring function, also independent of commercial activities. The RMD develops and implements risk policies, procedures, methodologies, and risk management infrastructures. Risks in relation to the limits established by the Bank are continuously measured and comprehensively reported to the appropriate committees. The Internal Control-Non Financial Risk Department (IC-NFR) is involved in monitoring and reporting of operational risks and establishing preventive control processes. The Compliance Department is also an independent body, reporting directly to the ACSB as well as to the Managing Board. The main purpose of the Compliance Department is to support GBI in complying with applicable laws and regulations, GBI policies and standards, and to follow the relevant group entities’ policies and principles. Compliance Department is responsible for AML-CTF Compliance, Corporate Compliance, Customer Compliance, Securities Compliance, and conducts its activities in scope of those areas. The Corporate Information Security Department (CISD) is responsible for identifying risks in the information technology systems and processes at GBI, as well as ensuring that technology-related threats to business continuity are identified and mitigated. The Internal Audit Department (IAD) monitors the governance frameworks around all risks through regular audits, and provides reports to the Managing Board and the ACSB. 30. Risk Appetite GBI’s Risk Appetite Framework, in line with that of the Group, determines the risks and risk levels that GBI is prepared to assume in order to achieve its business objectives. The establishment of the risk appetite has the following purposes: • • • • • To set the maximum risk levels that the Bank is willing to assume. To establish guidelines and the management framework to avoid actions that could threaten the future viability of the Bank. To establish a common terminology in the organization and to develop a compliance-driven risk culture. To ensure compliance with the regulatory requirements To facilitate communication with the regulators, investors and other stakeholders The Risk Appetite Framework is expressed through the following elements; Risk Appetite Statement: It sets out the general principles of the risk strategy of the Bank and the target risk profile. GBI’s Risk Policy is aimed to promote a responsible banking model, through prudent management and integrity, while targeting sustainable growth, risk adjusted profitability and recurrent value creation. To achieve these objectives, the risk management model is oriented to maintain a moderate risk profile that allows to keep strong financial fundamentals in adverse environments preserving our strategic goals, an integral view of risks, and a portfolio diversification by asset class and client segment, focusing on keeping a long term relationship with our customers. Core Metrics: They define, in quantitative terms, the target risk profile set out in the risk appetite statement in line with the strategy of the Bank. The core metrics used internally are expressed in terms of solvency (i.e. CET1 ratio), liquidity (i.e. LCR, loan to stable customer deposits ratio) and recurrent income (i.e. return on equity, net margin, cost of risk). Each core metric has three thresholds (the traffic-light approach), ranging from usual management of the business to higher levels of risk: management reference, maximum appetite and maximum capacity. In determining risk appetite, the Supervisory 102
82. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 30. Risk Appetite (continued) Board seeks a balanced combination of risk and return while paying close attention to the interests of all stakeholders. As such, the Supervisory Board reviews it on an annual basis at minimum. • • • • GBI’s solvency has always remained at an above-adequate level owing to its committed shareholders and risk-averse strategies. The Bank aims to hold a strong capital base with a high Tier 1 component. The Bank focuses in particular on ensuring sufficient liquidity and thus safe banking operations and sound financial conditions in both normal and stressed financial environments, while retaining a stable and diversified liquidity profile. In terms of financial performance, the Bank targets a return on equity level that is stable in the long-term and satisfies the stakeholders, including the shareholders, while maintaining core competencies and a strategic position in key markets. GBI is strongly committed to act with integrity and adhere to the highest ethical principles in its business conduct. By Type of Risk Metrics: These are defined in conjunction with the risk appetite core metrics. Compliance with the levels of by type of risk metrics ensures the compliance with the core metrics. Management Limits: The core metrics and metrics by type of risk are supported by an additional layer through the introduction of limits on specific risk types i.e. credit, market, structural interest rate, structural FX, liquidity and operational risk. The RAF was created to support the Bank’s core values and strategic objectives. Accordingly, GBI dedicates sufficient resources to ensure full compliance with all requirements as well as to establish and maintain a strong risk culture throughout the organization. Evaluation, monitoring and reporting is an important element of GBI’s RAF, which allows the Bank to ensure the compliance with the Risk Appetite set by the Supervisory Board. The Bank’s risk limits are continuously monitored through control functions. Credit Risk Credit risk is the current or prospective risk to earnings and capital arising from an obligor’s failure to meet the terms of any contract with the bank or otherwise fail to perform as agreed. The Bank is exposed to credit risk on various financial assets, including derivative instruments used for hedging and debt investments and and credit risk on off balance sheet instruments (loan commitments and guarantees issued). GBI is predominantly involved in portfolios such as sovereigns, banks, large corporates and trade finance activities, where limited number of defaults are observed. GBI's objective is to preserve a moderate risk profile by proactively managing an adequate return on available capital. GBI applies the Foundation Internal Ratings Based (F-IRB) Approach for the calculation of regulatory capital related to credit risk of Corporate, Institutional and Sovereign credit exposures since 2008 based on the permission obtained from DNB. GBI has dedicated internal rating models to assess the credit worthiness of counterparties, which are integrated in the credit decision making and monitoring processes. These models serve as a basis for the calculation of regulatory capital and economic capital that GBI has to maintain to cover expected and unexpected losses from its lending activities. Ratings are also integral parts of pricing and risk based performance measurement processes. Independent third party experts validate all rating models on an annual basis. For the IFRS-based reporting, the Bank has adopted an ECL methodology that makes use of the credit rating models that also serve as a basis of regulatory requirement under Internal Rating Based (IRB) approach. However, the regulatory rating models produce Through the Cycle (TTC) probability of defaults (PD), therefore certain layers have been introduced to produce Point in Time (PIT) estimates of PDs to be able to leverage these models in line with the IFRS 9 requirements. 103
83. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 31. Approach expected credit loss of financial assets GBI recognizes an ECL allowance on financial assets and loans measured at amortized cost and financial assets measured at FVOCI, loan commitments and financial guarantee contracts not measured at FVTPL based on IFRS 9. In chapter Significant accounting policies, the approach for ECL allowance is further elaborated. The breakdown of individually and collectively assessed ECL’s for loans, cash and non-cash loans is as follows: Summary of financial instruments to which the IFRS9 ECL requirements apply 31 December 2021 Stage 1 Collective 31 December 2020 Total carrying amount Total ECL allowance Carrying amount ECL allowanc e Carrying amount ECL allowance Carrying amount ECL allowance 675,396 30 - - - - - - 675,396 30 620,651 2,464,591 250,198 4,010,836 420,039 4,430,875 3,195 9,920 80 13,225 583 13,808 32,365 32,365 32,365 6,984 6,984 6,984 23,570 23,570 23,570 1,283 1,283 1,283 14,687 14,687 14,687 9,062 9,062 9,062 620,651 2,535,213 250,198 4,081,458 420,039 4,501,497 3,195 27,249 80 30,554 583 31,137 Total carrying amount Total ECL allowance Stage 1 Collective Stage 2 Individual Stage 3 Individual Collective ECL allowance Carrying amount ECL allowanc e 524,911 44 - - 644,364 2,023,691 102,773 3,295,739 555,743 3,851,482 2,456 9,114 219 11,833 671 12,504 18,720 18,720 18,720 6,182 6,182 6,182 Carrying amount Cash and balance with Central Banks Loans and Advances to Banks Loans and Advances to Customer Interest-bearing securities (FVOCI) Total On-balance sheet assets Commitment and Contingencies Total Stage 3 Individual Collective ECL allowance Carrying amount Cash and balance with Central Banks Loans and Advances to Banks Loans and Advances to Customer Interest-bearing securities (FVOCI) Total On-balance sheet assets Commitment and Contingencies Total Stage 2 Individual Carrying amount ECL allowance Carrying amount ECL allowance - - - - 524,911 44 9,877 37,000 46,877 2,922 49,799 95 553 648 14 662 13,103 13,103 13,103 8,422 8,422 8,422 654,241 2,092,514 102,773 3,374,439 558,665 3,933,104 2,551 24,271 219 27,085 685 27,770 Loans and advances to Banks and Customers in Stage 2 (Collective) has decreased to EUR 23.6 million (2020: EUR 46.9 million) due to the full repayment of the credit exposures. ECL allowance for Stage 3 loans has been increase slightly from EUR 8.4 million to EUR 9.1 million. The table below summarizes the movement of ECL allowance, per stage and balance sheet line item. Finally, the table shows the changes in ECL calculation during 2021 together with the drivers of changes (e.g. write-offs or transfer to Stage 2 or Stage 3). 104
84. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 31. Approach expected credit loss of financial assets (continued) Expected Credit Loss allowance movements Financial Asset - 31 December 2021 12-month ECL Stage 1 Lifetime ECL not creditimpaired Stage 2 Lifetime ECL creditimpaired Stage 3 Total (44) 14 (30) - - (44) 14 (30) (2,456) (739) (3,195) (95) 95 - - (2,551) (644) (3,195) (9,114) (136) 93 (6,735) 136 (93) 78 (2,462) 810 (8,422) (78) (634) Cash and balance with Central Banks Balance at 1 January Net remeasurement of ECL allowance Balance at period end Loans and advances to banks Balance at 1 January Transfer to Stage 1 Transfer to Stage 2 Net remeasurement of ECL allowance Balance at period end Loans and advances to customers Balance at 1 January Transfer to Stage 1 Transfer to Stage 2 Transfer to Stage 3 Net remeasurement of ECL allowance Financial assets that have been derecognised Write-offs Foreign exchange and other movements Balance at period end (126) (9,920) (1) (8,267) 402 (330) (9,062) (24,271) (3,733) 810 402 (457) (27,249) Financial assets at FVOCI Balance at 1 January Net remeasurement of ECL allowance Balance at period end (219) 139 (80) - - (219) 139 (80) Commitment and contingencies Balance at 1 January Transfer to Stage 1 Transfer to Stage 2 Net remeasurement of ECL allowance Balance at period end (671) (35) 123 (583) (14) 35 (21) - - (685) 102 (583) (637) 105 -
85. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 31. Approach expected credit loss of financial assets (continued) Expected Credit Loss allowance movements Financial Asset - 31 December 2020 12-month ECL Stage 1 Lifetime ECL not creditimpaired Stage 2 Lifetime ECL creditimpaired Stage 3 Total Balance at 1 January (32) - - (32) Net remeasurement of ECL allowance (12) - - (12) Balance at period end (44) - - (44) Cash and balance with Central Banks Loans and advances to banks Balance at 1 January (897) (1,006) - (1,903) Transfer to Stage 1 - - - - Transfer to Stage 2 1 (1) - - Net remeasurement of ECL allowance (1,560) 912 - (648) Balance at period end (2,456) (95) - (2,551) Loans and advances to customers Balance at 1 January (8,763) (1,882) (43,185) (53,830) Transfer to Stage 1 Transfer to Stage 2 (715) 715 - - 400 (400) - - Transfer to Stage 3 22 61 (83) - (425) (5,241) 1,236 (4,430) Financial assets that have been derecognised - - 3,066 3,066 Write-offs - - 30,268 30,268 367 12 276 655 (9,114) (6,735) (8,422) (24,271) Net remeasurement of ECL allowance Foreign exchange and other movements Balance at period end Financial assets at FVOCI Balance at 1 January Net remeasurement of ECL allowance Balance at period end (188) (188) (31) (31) (219) (219) Commitments and contingencies Balance at 1 January Transfer to Stage 1 Transfer to Stage 2 (563) (88) - (651) (57) 57 - - 76 (76) - - Net remeasurement of ECL allowance (127) 93 - (34) Balance at period end (671) (14) - (685) Sensitivity analysis GBI’s ECL allowance per 31 December 2021 is EUR 31.1 million (2020: EUR 27.8 million), out of which EUR 15.1 million (2020: EUR 13.2 million) is calculated by use of collective assessment. Said collective ECL allowance is sensitive to the forward-looking macroeconomic forecasts used as model inputs, the probability-weights applied to each of the scenarios, the loss given default rates (LGD) and the criteria for identifying a significant increase in credit risk. These elements require management judgement, and are subject to the Bank’s internal processes and controls. 106
86. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 31. Approach expected credit loss of financial assets (continued) Macro-economic models and probability weigths GBI has internal credit risk rating models in place for regulatory capital purposes where the PD’s are assessed on a borrower level and refer to the likelihood that a borrower will default. These models consider quantitative and qualitative scoring elements, and the produced PD’s are through the cycle (TTC). For IFRS9 purposes, the Bank has adopted an ECL methodology that makes use of the said credit rating models and converts the TTC PD’s to lifetime Point in Time (PIT) PD’s. IFRS 9 requires preparers to use multiple macroeconomic scenarios to produce probability-weighted lifetime ECL’s. GBI has three different macroeconomic models that are used according to the relevant geography of the borrower; Turkey, Europe and Global. These are regression models with one or more independent variables that aim to provide the best fit to the dependent variable, which is the observed default rates. GBI has considered various variables during the model development process and observed that real GDP change is observed to be the most relevant factor that impacts GBI’s credit forecast and actual credit losses. Each macro model consists of three macroeconomic scenarios, namely baseline, upside and downside scenarios, which are determined to reflect an unbiased and probability-weighted ECL amount. These forward-looking macroeconomic scenarios are subjective and incorporate uncertainty by nature. GBI makes use of BBVA’s internal GDP estimates, which are developed by the economic research team of BBVA, for its Baseline Scenario, which is considered a market-neutral view or market consensus for forecasts. Similarly, GBI makes use of BBVA economic research team estimates for the upside and downside scenarios. GBI considers that the baseline macroeconomic scenario presents the current economic cycle the most and therefore assigns the largest probability weight to this scenario, being 60%. Other two scenarios, Upside and Downside, are equally weighted with 20%. The GDP estimates and the probability weights applied to each of the three scenarios require management judgement. GBI has internal processes and controls in place where the range of possibilities and expectations referring to said judgements, are assessed, discussed, approved and monitored under the four eyes principle concept (three lines of defence). The ECL could change as per the changes in GDP growth. For example, management assessed that in case of a decrease in GDP estimates by 25 basis points, the ECL allowance for collectively assessed loans would increase by EUR 265 thousand (2020: EUR 221 thousand), whereas the increase of 25 basis points would result a decrease by EUR 260 thousand (2020: EUR 242 thousand). Loss given default GBI’s loan portfolio size is not sufficient to derive statistically significant data on historic losses and hence for most of the portfolio regulatory LGD benchmarks that are used for the regulatory capital requirement calculations, are employed to set the LGD. Significant increase in credit risk All assets that are subject to collective ECL assessment are allocated a 12 month ECL if it belongs in Stage 1, or a lifetime ECL in Stage 2. An asset belongs to Stage 2 if it is considered to have experienced a significant increase in credit risk since initial recognition. The staging process involves an assessment against both quantitative and qualitative criteria to determine the relative significance of credit risk deterioration. While qualitative criteria are based on, amongst others, forbearance indicators, the quantitative criterion is based on the assessment of the change in the probability of default (PD) of the borrower since initial recognition of the asset. The Bank compares the current PD over the life of the transaction with the original adjusted PD, so that both values are comparable in terms of default probability for their residual life. While comparing these PDs, GBI tests whether both the absolute and relative difference in these two PDs are above certain thresholds. The thresholds used for considering a significant increase in risk might differ as per the asset classes (i.e. sovereign, financial institutions, corporates) in line with the differences in the observed 107
87. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 31. Approach expected credit loss of financial assets (continued) default rates. The setting of thresholds requires management judgement, and is a key source of estimation uncertainty. The sensitivity of the thresholds is as follows: 2021: Analysis segment Relative Threshold (%) Absolute Threshold (%) ECL impact with a 50 bps lower Threshold ECL impact with a 50 bps higher Threshold LDP LDP (Banks & Sovereigns) 240 100 - - Wholesale Corporate 150 100 +802 thousand - Analysis segment Relative Threshold (%) Absolute Threshold (%) ECL impact with a 50 bps lower Threshold ECL impact with a 50 bps higher Threshold LDP LDP (Banks & Sovereigns) 240 100 - - Wholesale Corporate 150 100 +535 thousand -104 thousand Main segment 2020: Main segment It should be noted that the sensitivity is partially mitigated because 78% of the total assets as per year end comprise credit exposures with a maturity up to one year (2020: 75%). 32. Concentration Risk The Bank’s Wholesale Credit Risk Policy establishes the Bank’s decision-making process in granting credit limits, setting rules and guidelines for exposures that give rise to credit risk. In view of the internal ratings and credit assessment analyses of the obligors, the Credit Committee assigns the credit exposure limit. All obligors have individual credit limits based on their creditworthiness. Groups of connected obligors are subject to regulatory ‘group exposure’ limits, as well as internal Group Concentration Policy, to manage the concentration risk of the Bank effectively. Furthermore, as per the Country Concentration Policy, limits are in place that cap the maximum exposure to specific countries, to ensure that related risks do not threaten the asset quality or solvency of the Bank. Finally, the Sector Limit Policy is designed to minimize contagion risks. The effectiveness of risk monitoring is supported by internal systems ensuring proper compliance with the principle of segregation of duties and authorization levels. Regular monitoring by the Credit Risk Department of GBI’s exposure and compliance with the established credit limits ensures timely management of credit risk. The exposures to various customers, business lines and geographical locations are monitored on a regular basis by the Credit Division to ensure compliance with the established limits. Breakdown by geographical regions The geographical breakdown of carrying amounts assets and commitment and contingencies is based on customer domicile as follows in below tables. 108
88. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements The geographical breakdown of financial assets based on domicile4 As at 31 December 2021 — the Netherlands Carrying amount ECL Banks Carrying amount Loans and advances ECL Carrying amount ECL Interest-bearing securities Carrying amount Commitments and contingencies ECL Carrying amount Total ECL Carrying amount ECL 601,725 27 6,445 7 439,968 3,487 35,578 15 34,881 103 1,118,597 3,639 Stage 1 Stage 2 Stage 3 — Great Britain Stage 1 Stage 2 Stage 3 — Switzerland Stage 1 Stage 2 Stage 3 — Germany Stage 1 Stage 2 Stage 3 — USA Stage 1 — France Stage 1 — Rest of Europe Stage 1 Stage 2 Stage 3 — Rest of the world Stage 1 Stage 2 Stage 3 601,725 73,671 73,671 - 27 3 3 - 6,445 398,483 398,483 36,051 36,051 5,089 5,089 29,374 29,374 35,857 35,857 1,105 1,105 53,980 53,980 54,267 54,267 - 7 3,048 3,048 30 30 10 10 10 10 1 1 39 39 50 50 - 434,189 2,777 3,002 449,908 426,785 20,133 2,990 188,113 181,856 6,257 458,496 456,058 2,438 165,748 140,027 25,721 190,669 190,669 87,996 87,996 337,107 330,463 6,644 217,209 216,549 660 - 1,805 197 1,485 6,741 1,912 1,074 3,755 912 564 348 5,080 1,718 3,362 5,486 642 4,732 112 593 593 289 289 4,051 1,799 2,252 610 599 11 - 35,578 10,408 10,408 16,042 16,042 63,146 63,146 125,024 125,024 - 15 8 8 5 5 27 27 25 25 - 34,881 32,236 32,236 7,137 7,137 99,159 99,159 12,208 12,208 57,179 57,179 19,778 19,778 55,414 55,414 102,047 102,047 - 103 35 35 5 5 119 119 6 6 79 79 46 46 153 153 37 37 - 1,112,818 2,777 3,002 880,627 857,504 20,133 2,990 241,709 235,452 6,257 562,744 560,306 2,438 297,043 271,322 25,721 283,705 283,705 172,025 172,025 571,525 564,881 6,644 373,523 372,863 660 - 1,957 197 1,485 9,824 4,995 1,074 3,755 955 607 548 5,199 1,837 3,362 5,510 666 4,732 112 682 682 363 363 4,268 2,016 2,252 697 686 11 - Total: 675,396 30 620,651 3,195 2,535,213 27,249 250,198 80 420,039 583 4,501,497 31,137 Stage 1 Stage 2 Stage 3 — Turkey 4 Cash and Central Banks This table does not include the EUR 284 (2020: EUR 317) receivable in relation to the sale of shares (see note 6 for details). The counterparty for this receivable resides in the United Kingdom. 109
89. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements As at 31 December 2020 — the Netherlands Stage 1 Stage 2 Stage 3 — Turkey Stage 1 Stage 2 Stage 3 — Great Britain Stage 1 Stage 2 Stage 3 — Switzerland Stage 1 Stage 2 Stage 3 — Germany Stage 1 Stage 2 Stage 3 — USA Stage 1 — France Stage 1 — Rest of Europe Stage 1 Stage 2 Stage 3 — Rest of the world Stage 1 Stage 2 Stage 3 Total: Cash and Central Banks Carrying amount ECL Banks Carrying amount Loans and advances ECL Carrying amount ECL Interest-bearing securities Carrying amount Commitment and contingencies ECL Carrying amount Total ECL Carrying amount ECL 450,913 41 891 - 260,141 1,614 17,144 4 85,086 160 814,175 1,819 450,913 73,998 73,998 - 41 3 3 - 891 284,682 274,805 9,877 69,230 69,230 22,210 22,210 95,078 95,078 13,518 13,518 30,296 30,296 138,336 138,336 - 2,351 2,256 95 15 15 7 7 10 10 4 4 30 30 134 134 - 249,611 10,529 1 493,367 478,767 9,928 4,672 112,907 106,707 6,200 297,035 294,806 2,229 171,635 159,710 11,925 123,135 123,135 79,790 79,790 364,331 342,289 22,042 190,172 188,876 1,296 - 1,119 258 237 6,205 2,387 78 3,740 1,134 509 625 4,291 1,164 3,127 907 669 116 122 839 839 284 284 8,391 1,578 6,242 571 606 565 41 - 17,144 40,343 40,343 10,572 10,572 12,424 12,424 22,290 22,290 - 4 169 169 21 21 13 13 12 12 - 85,086 43,057 43,057 31,062 31.062 156,893 153,971 2,922 8,093 8,093 48,803 48,803 19,551 19,551 23,592 23,592 142,528 142,528 - 160 49 49 60 60 178 164 14 5 5 72 72 59 59 39 39 63 63 - 803,645 10,529 1 861,449 836,972 19,805 4,672 223,771 217,571 6,200 476,138 470,987 2,922 2,229 348,804 336,879 11,925 185,456 185,456 111,765 111,765 440,509 418,467 22,042 471,036 469,740 1,296 - 1,324 258 237 8,774 4,861 173 3,740 1,230 605 625 4,476 1,335 14 3,127 925 687 116 122 915 915 356 356 8,472 1,659 6,242 571 803 762 41 - 524,911 44 654,241 2,551 2,092,514 24,271 102,773 219 558,665 685 3,933,104 27,770 110
90. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 32. Concentration Risk (continued) Concentration risk by industry The Bank uses a common industry classification methodology based on the NACE system (European Statistical Classification of Economic Activities). This methodology has over 600 detailed industry descriptions, which are aggregated into 16 industry classes at the highest level. 31 December 2021 Carrying amount Stage 1 Stage 2 Administrative and support service activities 34,227 Construction Electricity, gas, steam and air conditioning supply Human health services and social work activities Information and communication 23,639 Manufacturing Transport and storage Wholesale and retail trade Financial and insurance activities Private Individuals - Total 1,013 35,240 496 23,639 78 1,804 - - 1,804 1 37,486 - - 37,486 27 13,028 - - 13,028 6 542,625 - 2,438 545,063 5,347 - - - - - 114,722 - - 114,722 399 Mining and quarrying Real estate activities ECL Stage 3 105,374 23,570 1,176 130,120 2,713 1,396,557 14,575 5,244 1,416,376 10,874 148,189 - 4,816 153,005 4,968 262 35,584 - - 35,584 Agriculture, forestry and fishing 5,846 - - 5,846 30 Professional, scientific and technical activities 5,510 17,790 - 23,300 2,048 2,464,591 55,935 14,687 2,535,213 27,249 Total Loans and Advances to Customers 31 December 2020 Carrying amount Stage 1 Stage 2 ECL Stage 3 Total Administrative and support service activities 40,419 - 916 41,335 574 Construction Electricity, gas, steam and air conditioning supply Human health services and social work activities Information and communication 20,633 3,877 - 24,510 102 34,251 - - 34,251 79 56,635 - - 56,635 49 13,024 - - 13,024 9 5231 Manufacturing 557,490 554 2,229 560,273 Mining and quarrying 14,807 - - 14,807 91 Real estate activities 120,367 11,925 - 132,292 553 Transport and storage 111,370 10,117 1,352 122,839 1,776 Wholesale and retail trade 886,736 18,718 5,286 910,740 11,530 Financial and insurance activities 116,971 6,880 3,320 127,171 3,970 201 Private Individuals 25,445 - - 25,445 Professional, scientific and technical activities 25,543 3,649 - 29,192 106 2,023,691 55,720 13,103 2,092,514 24,271 Total Loans and Advances to Customers 111
91. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 32. Concentration Risk (continued) Below is an overview of the portfolios split in Investment Grade (rating BBB- to AAA) and Non-Investment Grade (below BBB-) as of 31 December 2021 and 31 December 2020. All exposures that are covered under the F-IRB approach have a credit rating. Exposures subject to the Standardised Approach (SA) are classified based on the external credit ratings of Moody’s, S&P and Fitch, with the ‘average’ formula prescribed by Article 138 of the CRR are used. Exposures that are subject to SA, but do not have an eligible external credit rating are classified as not rated. Table also shows whether assets measured at Amortised Cost or FVOCI were subject to a 12-month ECL or lifetime ECL allowance and, in the latter case, whether they were credit-impaired. Specialized Lending are distinguished and separately rated according the CRR based on Risk Weights Category. 31 December 2021 FVTPL FVOCI Amortised cost Total On-balance assets Stage 1 Stage 2 Stage 3 Cash at Central Banks 675,396 - - 675,396 675,396 - - 675,396 620,651 - - 620,651 Investment Grade - - Loans and advances to banks Investment Grade - - 222,162 - - 222,162 Sub-Investment grade - - 398,489 - - 398,489 Not Rated - - - - - Loans and advances to customers - - 55,935 14,687 2,535,213 Investment Grade - - 532,556 - - 532,556 Sub-Investment grade - - 1,474,466 55,935 - 1,530,401 Specialized Lending (RW 50%-90%) - - 411,799 - - 411,799 Specialized Lending (RW 115%-250%) - - 45,770 - - 45,770 Not Rated - - - - - - Credit Impaired - - - - 14,687 14,687 Investments - 250,198 - - - 250,198 Investment Grade - 250,198 - - - 250,198 Sub-Investment grade 2,464,591 - - - - - - Financial assets at fair value through profit or loss 284 - - - - 284 Carrying amount on-balance assets 284 250,198 3,760,638 55,935 14,687 4,081,742 Commitment and contingencies - - 420,039 - - 420,039 Investment Grade - - 179,495 - - 179,495 Sub-Investment grade - - 129,025 - - 129,025 Specialized Lending (RW 50%-90%) - - 109,582 - - 109,582 Specialized Lending (RW 115%-250%) - - 1,937 - - 1,937 Not Rated - - - - - - 284 250,198 4,180,677 55,935 14,687 4,501,781 Carrying amount of total financial assets 112
92. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 32. Concentration Risk (continued) 31 December 2020 FVTPL FVOCI On-balance assets Cash at Central Banks Amortised cost Total Stage 1 Stage 2 Stage 3 524,911 - - - - Investment Grade - - 524,911 - - 524,911 Loans and advances to banks - - 644,364 9,877 - 654,241 Investment Grade - - 353,297 - - 353,297 Sub-Investment grade - - 291,067 9,877 - 300,944 Not Rated - - - - - - Loans and advances to customers - - 2,023,691 55,720 13,103 2,092,514 Investment Grade - - 513,678 - - 513,678 Sub-Investment grade - - 1,202,746 55,720 - 1,258,466 Specialized Lending (RW 50%-90%) - - 186,035 - - 186,035 Specialized Lending (RW 115%-250%) - - 84,974 - - 84,974 Not Rated - - 36,258 - - 36,258 Credit Impaired - - - - 13,103 13,103 Investments - 102,773 - - - 102,773 Investment Grade - 62,430 - - - 62,430 Sub-Investment grade - 40,343 - - - 40,343 Not Rated 317 - - - - 317 Carrying amount on-balance assets 317 102,773 3,192,966 65,597 13,103 3,374,756 Commitment and contingencies - - 555,743 2,922 - 558,665 Investment Grade - - 252,913 - - 252,913 Sub-Investment grade - - 172,991 2,922 - 175,913 Specialized Lending (RW 50%-90%) - - 120,648 - - 120,648 Specialized Lending (RW 115%-250%) - - 9,155 - - 9,155 Not Rated - - 36 - - 36 317 102,773 3,748,709 68,519 13,103 3,933,421 Carrying amount of total financial assets 113 524,911
93. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 33. Past-due analysis Loans that are past due are monitored closely, with ECL allowances raised as appropriate and in line with the internal ECL policies. A financial asset is, among others, considered to be defaulted if 90 days have passed since its repayment date (i.e. default starts on the 91st day). The following table sets out information about the past due status of loans and advances to customers in Stages 1, 2 and 3. Portfolio Breakdown based on number of days past due 31 December 2021 Not past due Cash and balances with Central Bank Loans and Advances to Banks Loans and Advances to Customer Financial assets at FVOCI Total carrying amount Commitment and contingencies Commitment and contingencies 34. Not past due Stage 3 Total Stage 2 Not past due >= 90 days Total Stage 3 Total - 675,396 - - - - - - 675,396 620,651 - 620,651 - - - - - - 620,651 2,464,591 - 2,464,591 55,935 - 55,935 6,018 8,669 14,687 2,535,213 250,198 - 250,198 - - - - - - 250,198 4,010,836 - 4,010,836 55,935 - 55,935 6,018 8,669 14,687 4,081,458 420,039 - 420,039 - - - - - - 420,039 Not past due Total carrying amount Total Stage 1 Stage 2 <=30 days past due 675,396 31 December 2020 Cash and balances with Central Bank Loans and Advances to Banks Loans and Advances to Customer Financial assets at FVOCI Stage 1 <=30 days past due Stage 1 <=30 days past due Total Stage 1 Not past due Stage 2 <=30 days past due Stage 3 Total Stage 2 Not past due >= 90 days Total Stage 3 Total 524,911 - 524,911 - - - - - - 524,911 644,364 - 644,364 9,877 - 9,877 - - - 654,241 2,023,691 - 2,023,691 55,720 - 55,720 3,320 9,783 13,103 2,092,514 102,773 - 102,773 - - - - - - 102,773 3,295,739 - 3,295,739 65,597 - 65,597 3,320 9,783 13,103 3,374,439 555,743 2,922 555,743 2,922 Modified loans The contractual terms of a loan may be modified for a number of reasons, including changing market conditions (e.g. due to the COVID 19 pandemic), customer retention and other factors not related to a current or potential credit deterioration of the customer. An existing loan whose terms have been modified may be derecognised and the renegotiated loan recognised as a new loan at fair value in accordance with the accounting policy as detailed in the Significant Accounting Policies. When the terms of a financial asset are modified and the modification does not result in derecognition, the determination of whether the asset’s credit risk has increased significantly reflects comparison of: • its remaining lifetime PD at the reporting date based on the modified terms; • with the remaining lifetime PD estimated based on data on initial recognition and the original contractual terms. The Bank renegotiates loans to customers in financial difficulties (referred to as ‘forbearance activities) to maximise collection opportunities and minimise the risk of default. Under the Bank’s policy, loan forbearance is granted on a selective basis if the debtor is currently in default on its debt or if there is a significant increase in credit risk (i.e. Stage 2), there is evidence that the debtor made all reasonable efforts to pay under the original contractual terms and the debtor is expected to be able to meet the revised terms. 114 558,665
94. GarantiBank International N .V. Notes to Financial Statements 34. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) Modified loans (continued) The revised terms usually include extending the maturity, changing the timing of interest payments and amending the terms of loan covenants. For financial assets that are modified, the estimate of PD reflects whether the modification has improved or restored the Bank’s ability to collect interest and principal. As part of this process, the Bank regularly evaluates the borrower’s payment performance against the modified contractual terms and considers various behavioural indicators. Generally, forbearance is a qualitative indicator of a significant increase in credit risk and an expectation of forbearance may constitute evidence that an exposure is credit-impaired. A customer needs to demonstrate consistently good payment behaviour over a period of time before the exposure is no longer considered to be credit-impaired/in default or the PD is considered to have decreased such that the ECL allowance reverts to being measured at an amount equal to Stage 1. Section ‘Significant accounting policies’ paragraph ‘Significant increase in credit risk’ explains when there is significant increase or decrease in credit risk. In relation to the COVID 19 pandemic, various government and private sector debt moratoria where agreed upon. The Bank has not participated in such moratoria. The following table provides information on financial assets that were modified while they had a ECL allowance measured at an amount equal to lifetime ECL (i.e. stage 2 and stage 3). Financial Assets modified during the period Amortised costs of financial assets Net Modification Loss 31 December 2021 31 December 2020 45,274 - 2,774 - No financial assets have been modified for which the ECL allowance has changed to a 12-month measurement during the period. 35. Collateral held and other credit enhancements The bank holds collateral and other credit enhancements against certain of its credit exposures. Loans and Advances to banks and customers The general creditworthiness of a counterparty tends to be the most relevant indicator of credit quality of a loan extended to it. However, collateral provides additional security. The Bank may establish collateral in the form of a first charge over real estate, pledged goods, receivables, investments, deposit, and/or any other liens and guarantees. At 31 December 2021, the net carrying amount of credit-impaired loans and advances to corporate customers amounted to EUR 14.7 million (2020: EUR 13.1 million) and the value of identifiable collateral (mainly commercial properties) held against those loans and advances amounted to EUR 9.5 million (2020: EUR 13 million). For each loan, and where appropriate, the value of disclosed collateral is capped at the carrying value of the loan that it is held against. In addition to the collateral included in the tables above, the Bank holds other types of collateral and credit enhancements, such as second charges and floating charges for which specific values are not generally available. The Bank’s reverse sale-and-repurchase transactions are covered by master agreements with netting terms similar to those of International Swaps and Derivatives Association (ISDA) master netting agreements. 115
95. GarantiBank International N .V. Notes to Financial Statements 35. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) Collateral held and other credit enhancements (continued) Investments At 31 December 2021, the maximum exposure to credit risk of the investments as at FVTPL or FVOCI is their carrying amount of EUR 250 million (2020: EUR 103 million). The Bank has not mitigated the credit risk exposure on these investments. Derivatives The Bank mitigates the credit risk of derivatives by entering into master netting agreements and holding collateral in the form of cash. Derivative transactions are entered into under ISDA master netting agreements. In general, under these agreements, in certain circumstances – e.g. when a credit event such as a default occurs – all outstanding transactions under the agreement with the counterparty are terminated, the termination value is assessed and only a single net amount is due or payable in settlement of all transactions with the counterparty. The Bank executes a credit support annex in conjunction with the ISDA agreement, which requires the Bank and its counterparties to post collateral to mitigate counterparty credit risk. Collateral is also posted daily in respect of derivatives transacted on exchanges and with CCPs. The following table sets out the principal types of collateral held against different types of financial assets. Quantification of the collateral arrangements relating to derivatives, reverse repurchase agreements and repurchase agreements is set out in the next section on offsetting financial assets and liabilities. As at 31 December 2021 Carrying amount Assets Loans and advances to banks Financial assets at fair value through profit or loss Mandatorily at fair value through profit or loss Financial assets at fair value through other comprehensive income Loans and advances to customers Total As at 31 December 2020 620,651 Cash Collaterals Received Off Balance sheet financial instruments4 Other collateral5 25,617 27,434 12,647 115,646 11,244 539,508 284 250,198 2,535,213 Carrying amount Assets Loans and advances to banks Financial assets at fair value through profit or loss Mandatorily at fair value through profit or loss Financial assets at fair value through other comprehensive income Loans and advances to customers Total 654,241 Cash Collaterals Received Off Balance sheet financial instruments4 154,499 33,306 46,929 46,929 19,789 53,095 Other collateral5 317 102,773 2,092,514 2,849,845 527,386 527,386 Off balance sheet financial instruments includes securities, guarantees and letters of credit. Other collateral consists of pledged stocks, receivables and commodities as well as mortgages on real estate and vessels. 4 5 116
96. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 36. Offsetting financial assets and liabilities The disclosures set out in the following tables include financial assets and financial liabilities that: • are offset in the Bank’s statement of financial position; or • are subject to an enforceable master netting arrangement or similar agreement that covers similar financial instruments, irrespective of whether they are offset in the statement of financial position. The ‘similar agreements’ include derivative clearing agreements and global master repurchase agreements. ‘Similar financial instruments’ include derivatives, sale-and-repurchase agreements and reverse sale-and-repurchase agreements. Financial instruments such as loans and deposits (excluding lending related to reverse sale-and-repurchase agreements) are not disclosed in the following tables unless they are offset in the statement of financial position. The ISDA and similar master netting arrangements do not meet the criteria for offsetting in the statement of financial position. This is because they create for the parties to the agreement a right of set-off of recognised amounts that is enforceable only following an event of default, insolvency or bankruptcy of the Bank or the counterparties or following other predetermined events. In addition, the Bank and its counterparties do not intend to settle on a net basis or to realise the assets and settle the liabilities simultaneously. The Bank receives and gives collateral in the form of deposits and marketable securities in respect of the following transactions: • derivatives; and • sale-and-repurchase, and reverse sale-and-repurchase, agreements. This collateral is subject to standard industry terms including, when appropriate, an ISDA credit support annex. This means that securities received/given as collateral can be pledged or sold during the term of the transaction but have to be returned on maturity of the transaction. The terms also give each party the right to terminate the related transactions on the counterparty’s failure to post collateral. Financial assets and liabilities subject to offsetting, enforceable master netting arrangements and similar agreement Related amounts not offset in the statement of financial position As at 31 December 2021 Types of financial assets Trading & Non-trading derivatives Reverse sale-and repurchase agreements Total Gross amounts of recognised financial assets Gross amounts of recognised financial liabilities offset in the statement of financial position Net amounts of financial assets presented in the statement of financial position Financial instruments (including non-cash collateral) Cash collateral received Net amounts 8,244 - 8,244 - 916 7,328 25,759 - 25,759 25,617 - 142 34,003 - 34,003 25,617 916 7,470 117
97. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 36. Offsetting financial assets and liabilities (continued) Related amounts not offset in the statement of financial position As at 31 December 2021 Types of financial liabilities Trading & Non-trading derivatives Sale-and repurchase and similar agreements Total Gross amounts of recognised financial liabilities Gross amounts of recognised financial assets offset in the statement of financial position Net amounts of financial liabilities presented in the statement of financial position Financial instruments (including non-cash collateral) Cash collateral pledged Net amounts 26,955 - 26,955 - 26,525 430 297,452 - 297,452 297,452 - - 324,407 - 324,407 297,452 26,525 430 Related amounts not offset in the statement of financial position As at 31 December 2020 Types of financial assets Trading & Non-trading derivatives Reverse sale-and repurchase agreements Total Gross amounts of recognised financial assets Gross amounts of recognised financial liabilities offset in the statement of financial position Net amounts of financial assets presented in the statement of financial position Financial instruments (including non-cash collateral) Cash collateral received Net amounts 4,265 - 4,265 - 1,786 2,479 157,237 - 157,237 154,499 - 2,738 161,502 - 161,502 154,499 1,786 5,217 Related amounts not offset in the statement of financial position As at 31 December 2020 Types of financial liabilities Trading derivatives & Non-trading derivatives Sale-and repurchase and similar agreements Total Gross amounts of recognised financial liabilities Gross amounts of recognised financial assets offset in the statement of financial position Net amounts of financial liabilities presented in the statement of financial position Financial instruments (including non-cash collateral) Cash collateral pledged Net amounts 9,303 - 9,303 - 4,695 4,608 217,029 - 217,029 217,029 - - 226,332 - 226,332 217,029 4,695 4,608 118
98. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 36. Offsetting financial assets and liabilities (continued) The gross amounts of financial assets and financial liabilities and their net amounts disclosed in the above tables have been measured in the statement of financial position on the following bases: - Trading derivatives: fair value; Non-trading derivatives: fair value; and assets and liabilities resulting from sale-and-repurchase agreements, reverse sale-and repurchase agreements: amortised cost. Reconciliation to the net amounts of financial assets and financial liabilities presented in the statement of financial position The following tables reconcile the ‘net amounts of financial assets and financial liabilities presented in the statement of financial position’, as set out above, to the line items presented in the statement of financial position. As at 31 December 2021 Net amount Line item in statement of financial position Carrying amount in statement of financial position Financial assets not in scope of offsetting disclosures Note Types of financial assets Trading derivatives 5,128 Trading derivatives 5,128 - 40 Non-trading derivatives 3,116 Non-trading derivatives 3,116 - 40 Reverse sale-and repurchase agreements 25,597 Loans and advances to banks 620,650 595,053 4 50,41 - 40 21,914 - 40 409,982 112,530 11 Types of financial liabilities Trading derivatives Non-trading derivatives Sale-and repurchase and similar agreements/ Central Bank borrowing 5,041 21,914 297,452 Trading derivatives Non-trading derivatives Deposits from banks 119
99. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 36. Offsetting financial assets and liabilities (continued) As at 31 December 2020 Net amount Line item in statement of financial position Carrying amount in statement of financial position Financial assets not in scope of offsetting disclosures Note Types of financial assets Trading derivatives 2,551 Trading derivatives 2,551 - 40 Non-trading derivatives 1,714 Non-trading derivatives 1,714 - 40 Reverse sale-and repurchase agreements 157,237 Loans and advances to banks 654,246 497,009 4 Types of financial liabilities Trading derivatives 1,531 Trading derivatives 1,531 - 40 Non-trading derivatives 7,772 Non-trading derivatives 7,772 - 40 344,614 127,585 11 Sale-and repurchase and similar agreements/ Central Bank borrowing 217,029 Deposits from banks Market risk Market risk arises from fluctuations in interest rates, foreign currency exchange rates and security prices. It is GBI’s policy to avoid exposure to significant open positions in interest rate and foreign currency risk, while optimising the return. The main market risks to which GBI is exposed to are interest rate risk and foreign currency risk which would arise through positions in banking book or trading book. GBI uses derivatives to mitigate market risks for trading and banking books. The banking book positions are intended to be held for the long-term (or until maturity) or for hedging other banking book positions. The trading book positions are typically held with a short-term trading intent or in order to hedge other positions in the trading book. GBI assumes limited market risks in trading activities by taking positions in debt securities, foreign exchange, and derivatives. The Bank has historically been conservative in running its trading book. The main strategy is to keep end-of-day trading positions at low levels within the predefined limits. 37. Governance The Managing Board has the overall responsibility for market risks and implements policies for effective market risk management. The Managing Board delegates its responsibilities to Risk Management Committee (RMC) for the purpose of monitoring market risks. It reviews and sets limits on products and desk levels based on the Bank’s risk appetite. GBI’s Global Markets unit actively manages market risk arising from the trading book within these limits. The Middle Office (first line) and the IC-NFR (second line) are established as independent control bodies. They monitor and follow up all trading transactions and positions on an ongoing basis. Trading activities are followed-up as per the position, stop-loss, sensitivity and Value at Risk (VaR) limits. RMD is responsible for the maintenance of internal models, monitoring of risk-based limits and performing stress tests and presenting the results to the related committees. VaR is supplemented by stress tests and scenario analyses in order to determine the effects of potential extreme 120
100. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 37. Governance (continued) market developments on the value of market risk sensitive exposures. Stress tests have the advantage of out-of-model analyses of the trading book. These scenarios are reviewed periodically and updated when necessary. The foreign currency risk and the interest rate risk arising from the banking book is managed by the Asset and Liability Department (ALM) based on the Structural FX Rate and Structural Interest Rate Risk policies set by the Managing Board and monitored by ALCO and RMD. Due to the fact that the bank hedges the market risk for the banking book and the trading book, concentration risk is insignificant. The following table sets out the allocation of assets and liabilities subject to market risk between trading and non-trading portfolios. Market risk – trading and non-trading portfolios 31 December 2021 Non-trading portfolio Trading portfolio Carrying amount Assets Cash and balances with central banks 675,396 - 675,396 Loans and advances to banks 620,651 - 620,651 284 Financial assets at fair value through profit or loss - Mandatorily at fair value through profit or loss 284 - - Trading derivatives 5,128 5,128 - - Non-trading derivatives 3,116 - 3,116 250,198 - 250,198 2,535,213 - 2,535,213 1,573 - 1,573 Financial assets at fair value through other comprehensive income Loans and advances to customers Other assets Liabilities Deposits from banks Deposits from customers 409,982 - 409,982 3,037,822 - 3,037,822 Financial liabilities at fair value through profit or loss - Trading derivatives - Non-trading derivatives 5,041 5,041 - 21,914 - 21,914 - - - 31,641 - 31,641 Subordinated liabilities Other liabilities, accrued expenses and provisions 31 December 2020 Non-trading portfolio Trading portfolio Carrying amount Assets Cash and balances with central banks 524,911 - 524,911 Loans and advances to banks 654,241 - 654,241 317 Financial assets at fair value through profit or loss - Mandatorily at fair value through profit or loss 317 - - Trading derivatives 2,551 2,551 - Non-trading derivatives 1,714 - 1,714 102,773 - 102,773 2,092,514 - 2,092,514 5,515 - 5,515 Financial assets at fair value through other comprehensive income Loans and advances to customers Other assets Liabilities Deposits from banks Deposits from customers 344,614 - 344,614 2,444,457 - 2,444,457 Financial liabilities at fair value through profit or loss - Trading derivatives 1,531 1,531 - - Non-trading derivatives 7,772 - 7,772 - - - 27,498 - 27,498 Subordinated liabilities Other liabilities, accrued expenses and provisions Note 17 Fair Value Hierarchy elaborates on used fair value data by GBI. 121
101. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 38. Interest Rate Risk on the Banking Book (IRRBB) Interest rate risk is defined as the risk of loss in interest earnings or in the economic value of banking book items as a consequence of fluctuation in interest rates. GBI perceives interest rate risk as a combination of repricing risk, yield curve risk, basis risk and option risk. The asset and liability structure of the Bank creates a certain exposure to IRRBB. Repricing risk is the most relevant one for GBI and the others are at immaterial levels as a result of the business model of the Bank. However, all interest rate risk types are monitored and their impact is assessed regularly. Business units are not allowed to run structural interest mismatch positions. As a result of this policy, day-to-day interest rate risk management is carried out by the ALM Department in line with the policies and limits set by ALCO, with the help of a well-defined internal transfer pricing process. IRRBB is measured and monitored at each meeting of ALCO by using Duration, Repricing Gap and Sensitivity analyses. Sensitivity analyses are based on both economic value and earnings perspectives. Interest sensitivity is measured by applying standard parallel yield curve shifts, historical simulation and other yield curve twist scenarios. All analyses are based on the interest rate repricing maturities. Behavioral analyses are used for the products that do not have contractual maturities; for GBI the only product that falls under this condition is retail demand deposits. To assess the interest rate related behavior of these liabilities, GBI conducts a demand deposit modelling analysis to predict deposit outflow patterns over time, taking into account historical deposit trends and various factors such as deposit age and market rates. The Repricing Gap analysis shows interest bearing assets and liabilities broken down by when they are next due for repricing. This analysis is used as a supplementary measure to duration in order to point out interest bearing inflows/outflows and their maturities. The following table provides a maturity calendar of all interest-bearing financial instruments, including derivatives as of 31 December 2021, which is based on remaining days to maturity for fixed rate instruments and next repricing date for floating rate instruments: IRRBB Demand Assets Liabilities Derivatives < = 3 months > 3 months <= 1 year > 1 year <= 5 years > 5 years Total 93,729 (269,274) - 2,668,393 (734,640) 16,829 903,883 (1,431,441) 19,375 484,280 (577,128) (55,986) - 4,150,285 (3,012,483) (19,782) Net interest position 31 December 2021 (175,545) 111 1,950,582 (508,183) (148,834) - 1,118,020 Net interest position 31 December 2020 (98,845) 1,642,021 (565,266) (39,123) (16,495) 922,292 The calculation of the Economic Value of Equity (EVE) analysis as at 31 December 2021 shows that, assuming an unchanged structure of assets, liabilities and off-balance sheet items, an interest increase of one percent, taking into account a parallel movement of the risk-free yield curves, would result in an increase in the economic value of the Bank’s equity amounting to approximately EUR 1,506 (31 December 2020: EUR 4,573 increase). GBI also measures interest rate sensitivity of the equity by using historical volatility approach. Historical scenarios are applied to the whole banking book in a systematic manner in order to find the day in history, which would have the maximum negative impact on the economic value of equity. Scenarios are determined based on the interest rates collected at different currencies and maturities for a 5-year historical period. 122
102. GarantiBank International N .V. Notes to Financial Statements 38. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) Interest Rate Risk on the Banking Book (IRRBB) (continued) The Earnings at Risk (EaR) analysis focuses on the effects of interest rate changes on the Bank’s reported earnings over one year and two years. The standard gradual shift in the yield curve is applied for the calculation of the regulatory stress test; the interest rates are assumed to increase (or decrease) within one year and to remain at that level in the second year. The Bank has a moderate duration structure. The duration mismatch is stable as a natural consequence of the clear business model of the Bank. All interest rate sensitivity analyses are also used for evaluating hedging strategies, internal limit setting and portfolio monitoring purposes, enabling GBI to manage interest rate risk in a proactive manner. GBI uses interest rate swaps and forward rate agreements to hedge interest rate risk in major currencies in its banking book, depending on the composition of the balance sheet. 39. Currency risk Foreign currency risk is the risk that the fair value or future cash flows of an exposure will fluctuate because of changes in foreign exchange rate compared to the functional currency (Euro). GBI manages structural currency risk in line with the policies and the risk appetite set by the Supervisory Board. The Bank uses FX hedging derivatives such as currency swaps and currency forward contracts in convertible currencies to manage the currency risk inherent to the balance sheet. For the derivative contracts concluded to mitigate currency risk, GBI applies cashflow hedge accounting as defined under IAS 39. The total equivalent of net balance in foreign currencies is EUR (15,347) (2020: EUR (4,817)). The currency position is mitigated through derivative instruments. The notional amount of those derivatives is recorded as an off balance sheet position. Table below shows GBI’s exposures for different currencies. Concentration risk by currency exposure 31 December 2021 Assets Cash and balances with central banks Loans and advances to banks Financial assets at fair value through profit or loss Mandatorily at fair value through profit or loss Trading derivatives Non-trading derivatives Financial assets at fair value through other comprehensive income Loans and advances to customers Property and equipment Intangible assets Current tax asset Other assets Total Assets Liabilities Deposits from banks Deposits from customers Financial liabilities at fair value through profit or loss Trading derivatives Non-trading derivatives Subordinated liabilities Deferred tax liability Other liabilities, accrued expenses and provisions Shareholder's equity Total Liabilities Net On Balance Sheet Position Off Balance Sheet Position Net Position 123 USD TRY Other Total 372,035 622 3,837 376,494 284 - - - 284 - - - - - 1,387,377 1,759,696 10,538 11,160 84,156 87,993 1,482,071 1,858,849 87,057 1,040,292 4,167 20,140 38,070 107,197 1,082,529 18,174 3 2 18,179 1,145,523 4,170 58,212 1,207,905 614,173 (629,704) 6,990 (7,331) 29,781 (29,624) 650,944 (666,659) (15,531) (341) 157 (15,715)
103. GarantiBank International N .V. Notes to Financial Statements 39. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) Currency risk (continued) 31 December 2020 Assets Cash and balances with central banks Loans and advances to banks Financial assets at fair value through profit or loss Mandatorily at fair value through profit or loss Trading derivatives Non-trading derivatives Financial assets at fair value through other comprehensive income Loans and advances to customers Property and equipment Intangible assets Current tax asset Other assets Total Assets Liabilities Deposits from banks Deposits from customers Financial liabilities at fair value through profit or loss Trading derivatives Non-trading derivatives Subordinated liabilities Deferred tax liability Other liabilities, accrued expenses and provisions Shareholder's equity Total Liabilities Net On Balance Sheet Position Off Balance Sheet Position Net Position USD TRY Other Total 343,945 4,767 1,711 350,423 317 - - - 317 - 40,343 - - 40,343 901,881 978 1,287,464 71,496 76,263 64,470 66,181 1,037,847 978 1,429,908 183,559 521,907 6,605 5,353 30,453 188,912 558,965 16,688 24 - 16,712 722,154 6,629 35,806 764,589 565,310 (569,185) 69,634 (70,869) 30,375 (30,082) 665,319 (670,136) (3,875) (1,235) 293 (4,817) Sensitivity analysis FX positions Sensitivity analysis specifically on FX positions are not presented as result of effective risk mitigation whereby the net positions reported in the preceding table are immaterial. 124
104. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 40. Derivatives and Hedge Accounting Derivatives The breakdown of the fair value of GBI’s derivative portfolio to product type is as follows: 31 December 2021 31 December 2020 Carrying value assets Carrying value liabilities Carrying value assets Carrying value liabilities 4,789 4,756 1,179 156 307 254 710 656 - - 601 - - - - 601 Derivatives held for trading Foreign currency swaps Foreign currency forwards Foreign currency options (purchased) Foreign currency options (sold) Other derivatives Subtotal 32 31 61 118 5,128 5,041 2,551 1,531 Derivatives held for risk management - economic hedge relationships Foreign currency swaps 115 15,122 1,154 704 Foreign currency fowards 9 - 88 0 Other derivatives - - - 3 124 15,122 1,242 707 Subtotal Derivatives held for risk management - fair value hedge accounting relationships Interest rate swaps - 583 - 1,435 Subtotal - 583 - 1,435 Derivatives held for risk management - cash flow hedge accounting relationships Interest rate swaps Foreign currency swaps Foreign currency forwards - 1,702 - 2,650 2,735 4,240 472 2,887 257 267 - 93 Subtotal 2,992 6,209 472 5,630 Total 8,244 26,955 4,265 9,303 Derivatives held for trading Derivatives held for trading relate to client-driven derivative sales and trading activities, and associated market risk hedging. Typical derivative transactions with clients mostly encompass standardised derivative products (so called “plain vanilla”). Any derivative transaction that is conducted with clients, is offset by GBI with a similar derivative transaction with a professional counterparty in order mitigate risks. Any realized and unrealized gains or losses on derivatives used for client driven trading business are recognized immediately in Valuation results and net trading income (see Note 21). Derivatives held for risk management GBI also uses derivatives for purposes other than trading, primarily for hedging, in conjunction with the management of interest rate and foreign exchange risk related to the funding, lending, and asset/liability management. This involves interest rate swaps to manage our exposures to interest rate risk and currency swaps to manager our foreign currency risk. 125
105. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 40. Derivatives and Hedge Accounting (continued) Certain derivatives are specifically designated and qualify for hedge accounting (see ‘Hedge Accounting’ section below). From time to time, we also enter into derivative transactions to economically hedge certain exposures that do not otherwise qualify for hedge accounting, or where hedge accounting is not considered economically feasible to implement. In such circumstances, changes in fair value are presented in Valuation results and net trading income (see Note 21). Hedge Accounting Fair value hedges of interest rate risk GBI uses interest rate swaps to hedge its exposure to changes in the fair values of fixed rate bonds in our FVOCI portfolio. Pay-fixed/receive-floating interest rate swaps are matched to specific issuances of fixedrate notes. GBI’s approach to managing market risk, including interest rate risk, is discussed in market risk section of these disclosures. Interest rate risk to which GBI applies hedge accounting arises from fixed-rate bonds whose fair value fluctuates when benchmark interest rates change. Hedge accounting is applied where economic hedge relationships meet the hedge accounting criteria. Before fair value hedge accounting is applied by GBI, it first determines whether an economic relationship between the hedged item and the hedging instrument exists based on an evaluation of the qualitative characteristics of these items and the hedged risk. Occasionally, where deemed necessary, this is supported by quantitative analysis. GBI considers whether the critical terms of the hedged item and hedging instrument closely align when assessing the presence of an economic relationship. In addition to this qualitative assessment, the prospective hedge effectiveness is assessed with a sensitivity analysis approach. This method consists of measuring the effect of a parallel shift in the underlying hedged risks (a flat shift of 200 base points) on both the hedging instrument and the hedged item. The Bank establishes a hedge ratio by aligning the par amount of the fixed-rate bonds and the notional amount of the interest rate swap designated as a hedging instrument. At each reporting period the effectiveness of the hedge relationship is assessed with a dollar off-set method on a cumulative basis. The hedge is demonstrated to be effective by dividing the cumulative change on the clean fair value (i.e. excluding accrued interest) of the hedging instrument with the cumulative change in clean fair value of the hedged items attributable to the hedged risk. If the ratio is within the range of 80%-125%, the hedge relationship is considered to be effective. In these hedge relationships, the main sources of ineffectiveness are: • • the effect of the counterparty and GBI’s own credit risk on the fair value of the interest rate swap, which is not reflected in the fair value of the hedged item attributable to the change in interest rate; and differences in maturities of the interest rate swap and the loans or the notes. There were no other sources of ineffectiveness in these hedge relationships. As at 31 December 2021, GBI held interest rate swaps as hedging instruments in fair value hedges of interest risk with the following maturity profile: Maturity 2021 Less than 1 year Nominal amount Average fixed interest rate Risk category Maturity 2020 1–5 years More than 5 years Less than 1 year 1–5 years More than 5 years - 20,000 - - 40,427 - - 1.13% - - 1.50% - Interest rate risk Hedge of bonds in FVOCI 126
106. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 40. Derivatives and Hedge Accounting (continued) The amounts relating to items designated as hedging instrument and hedge ineffectiveness are as follows: Carrying amount Nominal amount Assets Liabilities Line item in the statement of financial position where the hedging instrument is included Changes in fair value used for calculating hedge ineffectiveness Line item in profit or loss that includes hedge Ineffectiveness Hedge ineffectiveness recognised in profit or loss Interest rate risk 2021 Interest Rate Swaps – bonds in FVOCI 20,000 583 Financial liabilities at FVTPL – non trading derivatives (577) (63) Valuation results and net trading income 40,427 1,435 Financial assets / liabilities at FVTPL – non trading derivatives (1,364) 25 Valuation results and net trading income 2020 Interest Rate Swaps – bonds in FVOCI The amounts relating to items designated as hedged item are as follows: Accumulated amount of fair value hedge adjustments on the hedged item included in the carrying amount of the hedge item Carrying amount Nominal amount Assets Liabilities Assets Liabilities 2021 Bonds in FVOCI 20,000 20,514 - 514 - 2020 Bonds in FVOCI 40,427 41,530 - 1,392 - Line item in the statement of financial position where the hedged item is included Financial Assets at Fair Value Through Other Comprehensive income Financial Assets at Fair Value Through Other Comprehensive income Changes in fair value used for calculating hedge ineffectiveness Accumulated amount of fair value hedge adjustments remaining in the statement of financial position for any hedged items that have ceased to be adjusted for hedging gains and losses 514 - 1,392 - Cash flow hedges of interest rate risk and foreign currency GBI uses pay-fixed/receive-floating interest rate swaps to hedge the interest rate risks in respect of the benchmark interest rate (mainly Euribor or Libor) from the received floating-rate EURO deposits. The Bank hedges interest rate risk to the extent of benchmark interest rate exposure on its floating-rate EURO deposits to mitigate variability in its cash flows. The Bank also use currency swaps to hedge against the foreign currency exposure. These swaps enable GBI to fix exchange rate and eliminate variability in cash flows the external parties (both borrowers and lenders) as a result of currency fluctuations. Hedge accounting is applied where economic hedge relationships meet the hedge accounting criteria. GBI’s approach to managing market risk, including foreign currency risk, is discussed in note 37. GBI’s exposure to market risk is disclosed in notes 38 and 39. GBI determines the amount of the exposure to which it applies hedge accounting by assessing the potential impact of changes in foreign currency exchange rates on the future cash flows from its issuance of floating-rate notes denominated in foreign currencies. This assessment is performed using analytical techniques, such as cash flow sensitivity analysis. 127
107. GarantiBank International N .V. Notes to Financial Statements 40. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) Derivatives and Hedge Accounting (continued) As noted above for fair value hedges, by using derivative financial instruments to hedge exposures to changes in foreign currency exchange rates, GBI exposes itself to credit risk of the counterparties to the derivatives, which is not offset by the hedged items. This exposure is managed similarly to that for fair value hedges. GBI determines whether an economic relationship exists between the cash flows of the hedged item and hedging instrument based on an evaluation of the qualitative characteristics of these items and the hedged risk. Occasionally, where deemed necessary, this is supported by quantitative analysis. GBI considers whether the critical terms (being: notional amount, contract currency, maturity date) of the hedged item and hedging instrument closely align when assessing the presence of an economic relationship. At each reporting date (i.e. monthly) the effectiveness of the hedge relationship is assessed using the same approach as used for prospective testing. In these hedge relationships, the main sources of ineffectiveness are: • • the effect of the counterparty and GBI’s own credit risk on the fair value of the swap, which is not reflected in the fair value of the hedged item attributable to the change in interest rate and foreign currency; and differences in maturities or timing of cash flows of the swap and the hedged item. There were no other sources of ineffectiveness in these hedge relationships. As at 31 December 2021, GBI held the following instruments to hedge exposures to changes in interest rates and foreign currency. Maturity 31 December 2021 More Less than than 1 year 1–5 years 5 years Maturity 31 December 2020 More Less than 1–5 than 1 year years 5 years Interest Rate Risk Interest rate swaps Nominal amount - 35,000 - - Average fixed rate - 1.17% - - 35,00 0 1.17% 11,078 1,629 - 66,915 - - 12.87 12.28 - 9.29 - - 97,073 - - - - - 1.19 - - - - - 4,398 - - 8,735 - - - Foreign Currency Risk Currency swaps (EUR:TRY) Nominal amount Average EUR–TRY exchange rate Currency swaps (EUR:USD) Nominal amount Average EUR–USD exchange rate Currency swaps (EUR against other currencies) Nominal amount 128
108. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 40. Derivatives and Hedge Accounting (continued) The amounts relating to items designated as hedging instruments and hedge ineffectiveness were as follows. Carrying amount Line item in the statement of financial position where the hedging instrument is included Cumulative changes in fair value used for calculating hedge ineffectiveness Change in the value of the hedging instrument recognised in OCI in the period Hedge ineffectiveness recognised in profit or loss Line item in profit or loss that includes hedge ineffectiveness Amount reclassified from the hedge reserve to profit or loss Line item in profit or loss affected by the reclassification Nominal amount Assets Liabilities 35,000 - 1,702 Financial liabilities at FVTPL Nontrading derivatives (186) (186) - Valuation results and net trading income - Valuation results and net trading income 35,000 - 2,650 Financial liabilities at FVTPL Nontrading derivatives (1,156) (1,156) 13 Valuation results and net trading income - Valuation results and net trading income 12,707 2,873 - 233 233 - 101,471 119 4,508 (265) (265) - 66,915 173 2,888 (246) 210 - 8,735 273 93 (13) (13) - Interest rate risk 2021 Interest rate swaps 2020 Interest rate swaps Foreign currency risk 2021 (EUR:TRY) (EUR:Other) Financial assets/liabilities at FVTPL Nontrading derivatives Valuation results and net trading income 251 Valuation results and net trading income 976 13 Valuation results and net trading income 2020 (EUR:TRY) (EUR:Other) Financial assets/liabilities at FVTPL Nontrading derivatives 73 Valuation results and net trading income The amounts relating to items designated as hedged items were as follows. Change in value used for calculating hedge ineffectiveness Cash flow hedge reserve Balances remaining in the cash flow hedge reserve from hedging relationships for which hedge accounting is no longer applied Deposits from customers (186) - - Deposits from customers (1,156) - - Line item in the statement of financial position in which the hedged item is included Interest rate risk 2021 EUR deposits 2020 EUR deposits Currency risk 2021 TRY Loans Loans and advances to customers 233 - - Other loans Loans and advances to customers (265) - - TRY Loans Loans and advances to customers 246 - - Other loans Loans and advances to customers 13 - - 2020 129
109. GarantiBank International N .V. Notes to Financial Statements 40. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) Derivatives and Hedge Accounting (continued) Reconciliation of components of equity The following table provides a reconciliation by risk category of components of equity and analysis of OCI items resulting from hedge accounting. Cash flow hedge reserve Balance at 1 January 2021 2020 (1,066) (1,893) Effective portion of changes in fair value: - Interest rate risk 972 (138) - Currency risk (32) 197 - - 264 1,049 Related tax (300) (281) Balance at 31 December (162) (1,066) Net amount reclassified to statement of profit or loss: - Interest rate risk - Currency risk Liquidity and Funding Risk Liquidity risk is defined as the risk that the Bank may not be able to fulfil its payment obligations in a timely manner due to the lack of available cash or cash inflows in quality and in quantity to cover the cash outflows in a complete and timely manner due to imbalances in the cash flows of the Bank.Thus liquidity risk management focuses primarily on short-term scenarios and solutions. Funding risk arises when illiquid asset positions cannot be funded at the expected terms and when required or at extensive cost. Thus funding risk management focuses primarily on long term scenarios and solutions. The main objective of GBI’s liquidity and funding risk policy is to maintain sufficient liquidity to ensure safe banking operations, a stable long-term liquidity profile, and a sound financial condition, both in normal and stressed financial environments. The liquidity and funding risk policy is approved by the Supervisory Board, and aims to mitigate GBI’s on and off-balance sheet risks that are associated with liquidity mismatches, while complying with the related regulatory framework. The policy describes the governance of liquidity risk at GBI, and provides high level principles for day-to-day and long-term liquidity management. GBI carries out an extensive Internal Liquidity Adequacy Assessment Process (ILAAP), where all qualitative and quantitative aspects of liquidity risk management at the Bank are monitored using established limits and early warning indicators. The ILAAP framework details the liquidity risk appetite and funding strategy and is continuously reviewed. The funding strategy is also reviewed annually through the budget process with the establishment of the funding plan. The Supervisory Board monitors whether the Bank remains in line with the strategy and plan. At the bank level, ALCO monitors liquidity risk, implements the appropriate policies as defined by the Supervisory Board, makes pricing decisions through the Internal Transfer Pricing (ITP) process, and directs the Bank’s overall liquidity strategy. In case of a liquidity squeeze or an emergency situation, GBI has a detailed contingency funding plan, enabling the Bank to govern crisis management. ALCO has delegated day-to-day liquidity management to the ALM, the department responsible for managing the overall liquidity risk position of the Bank. It also manages intraday liquidity as per the principles of 130
110. GarantiBank International N .V. Notes to Financial Statements As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) intraday liquidity management established in the ILAAP Framework. The ALM manages all cash flows along with expected changes in business-related funding requirements. A related operations unit, independent from the front office, performs the role of collateral management and executes the settlements of all transactions. The RMD performs liquidity risk assessment and analyses, develops required methodologies, and conducts regular stress tests to ensure the Bank is operating with sufficient liquidity. The RMD also reports comprehensively on liquidity risk directly to ALCO and to the Supervisory Board. 41. Funding concentration GBI aims for a diversified funding mix in terms of instrument types, fund providers, geographic markets, and currencies. In general, retail funding is the primary funding source, owing to the Bank’s wellestablished position in Dutch and German retail markets. This funding structure enables the Bank to have a positive liquidity gap even when the wholesale funding market dries up. Non-financial corporations, with which the Bank has established long-lasting relationships through its various financial services offerings, constitute the major part of the non-retail deposits. Behavioral analyses of retail deposits held at the Bank show high stickiness ratios, even during times of stress in local and global markets, indicating the resilience of this funding base. Similarly, deposits by non-financial counterparties exhibit a high proportion of non-retail deposits which are held at the Bank over long periods of time, contributing to the stability of the Bank’s unsecured funding. The Bank’s funding from other financial institutions includes money market borrowings and transactional and structured instruments on bilateral or syndicated bases. These funding sources leverage the Bank’s trade finance franchise and transaction flow reciprocity. The Bank also makes use of secured funding from time to time in order to increase the diversity of resources. GBI aims primarily for a stable funding profile and conducts business activities that are characterized by short-term lending. This strategy enables the quick accumulation of a liquidity buffer in stressed financial environments, and the equally efficient build-up of short-term assets once the stress has passed. 131
111. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 42. Asset encumbrance The following table sets out the total financial assets recognised in the statement of financial position that had been pledged as collateral for liabilities as at 31 December 2021 and 2020 as well as the availability of the Bank’s financial assets to support future funding. As at 31 December 2021 Loans and advances to banks Loans and advances to customers Financial assets at fair value through other comprehensive income Total As at 31 December 2020 Loans and advances to banks Loans and advances to customers Financial assets at fair value through other comprehensive income Total Carrying amount of encumbered assets Of which: ECB eligible Carrying amount of nonencumbered assets Of which: ECB eligible Total Of which: ECB eligible 26,525 - 594,126 - 620,651 36,700 36,700 2,498,513 - 2,535,213 36,700 250,198 250,198 - - 250,198 250,198 313,423 286,898 3,092,639 - 3,406,062 286,898 Carrying amount of encumbered assets Of which: ECB eligible Carrying amount of nonencumbered assets Of which: ECB eligible Total Of which: ECB eligible 4,695 - 649,551 - 654,246 - 49,713 49,713 2,042,801 - 2,092,514 49,713 62,430 62,430 40,343 - 102,773 62,430 116,838 112,143 2,732,695 - 2,849,533 112,143 Financial assets are pledged as collateral as part of sales and repurchases, secured funding transactions and derivative transactions under terms that are usual and customary for such activities. In addition, as part of these transactions, the Bank has received collateral that it is also permitted to sell or repledge in the absence of default. At 31 December 2021, the fair value of financial assets accepted as collateral that the Bank is permitted to sell or repledge in the absence of default was EUR 25.6 million (2020: EUR 154.5 million). At 31 December 2021, the fair value of financial assets accepted as collateral that had been sold or repledged was EUR 25.6 million (2020: EUR 154.5 million). The Bank is obliged to return equivalent securities. At 31 December 2021, for derivative liabilities that are classified as trading liabilities and derivatives liabilities held for risk management, the Bank had posted cash collateral with its counterparties for which it had recognised receivables of EUR 26.5 million (2020: EUR 4.7 million). These receivables are regarded as encumbered and included in loans and advances to banks. The encumbered assets have been pledged as collateral for the following financial liabilities: Liabilities for which assets have been pledged Carrying amounts of financial liabilities Deposits from banks Derivatives Total 31 December 2021 297,452 6,345 303,797 132 31 December 2020 217,029 9,303 226,332
112. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 43. Regulations Compliance with regulatory requirements related to liquidity risk is an integral part of liquidity risk management at GBI. As such, the Bank ensures that it is in line with all regulations in place in its jurisdiction. In this context, the Bank monitors and reports the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) as per the Capital Requirement Regulation (CRR). Hence, GBI actively manages the level and composition of its High Quality Liquid Asset (HQLA) buffer, which is composed of various types of assets including cash held at central banks as well as freely available central bank-eligible or investment grade-marketable securities. Furthermore, GBI frequently monitors liquidity risk through various analyses including loan-to-deposit ratios, contractual maturity gap analyses, and stress tests that are designed according to a variety of scenarios. These allow the Bank to assess the impacts of diverse shocks on its liquidity position. Shock factors are based on bank- or market-specific liquidity squeezes. Shocks are applied to all on- and offbalance sheet items, including derivatives, to estimate cash flows under different stress scenarios. By using regulatory and internally developed stress tests, the Bank aims to hold a sufficient liquidity buffer in order to meet any sudden liquidity needs in times of stress. 44. Exposure to liquidity risk The following table provides a maturity analysis of assets and liabilities according to their contractual remaining maturity at the reporting date. The amounts are gross and undiscounted and exclude the impact of netting agreements. The inflows/(outflows) disclosed in this table represent the contractual undiscounted cash flows relating to derivative financial liabilities held for risk management purposes and which are not usually closed out before contractual maturity. The disclosure shows net cash flow amounts for derivatives that are net cashsettled and gross cash inflow and outflow amounts for derivatives that have simultaneous gross cash settlement. Maturity analysis (contractual) assets and liabilities On demand <=3 months 3 months - 1 year 1 - 5 years > 5 years Undistributed1 Total Cash and balances with central banks Loans and advances to banks Financial assets at fair value through profit or loss Mandatorily at fair value through profit or loss Trading derivatives Non-trading derivatives Financial assets at fair value through other comprehensive income Loans and advances to customers 675,396 55,287 251,511 284,448 29,405 - - 675,396 620,651 - 53,067 74,399 122,732 - - 250,198 66,931 1,394,458 287,275 600,781 171,081 14,687 2,535,213 Total Assets 797,898 1,703,663 648,974 753,683 171,081 14,687 4,089,986 Deposits from banks Deposits from customers Financial liabilities at fair value through profit or loss Trading derivatives Non-trading derivatives Subordinated liabilities 28,588 1,587,134 66,331 741,100 17,611 425,642 297,452 283,104 841 - 409,982 3,037,822 - 3,811 18,494 - 1,230 1,136 - 2,284 - - - 5,041 21,914 - 1,615,722 829,736 445,619 582,841 841 - 3,474,759 31 December 2021 Total Liabilities 284 - - - - - 284 - 3,886 741 1,242 1,610 765 - - 5,128 3,116 133
113. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Notes to Financial Statements 44. Exposure to liquidity risk (continued) 31 December 2020 Cash and balances with central banks Loans and advances to banks Financial assets at fair value through profit or loss Mandatorily at fair value through profit or loss Trading derivatives Non-trading derivatives Financial assets at fair value through other comprehensive income Loans and advances to customers Total Assets Deposits from banks Deposits from customers Financial liabilities at fair value through profit or loss Trading derivatives Non-trading derivatives Subordinated liabilities Total Liabilities 1 On demand <=3 months 3 months - 1 year 1 - 5 years > 5 years Undistributed1 Total 524,911 22,752 345,744 272,370 13,375 - - 524,911 654,241 - - 317 - - - 317 - 2,257 1,658 294 56 - - - 2,551 1,714 - - 22,948 79,825 - - 102,773 44,974 961,184 329,085 708,442 35,726 13,103 2,092,514 592,637 1,310,843 625,070 801,642 35,726 13,103 3,379,021 12,982 1,523,281 126,881 441,612 58,754 300,443 145,997 161,107 18,014 - 344,614 2,444,457 - 1,261 3,571 - 270 116 - 4,085 - - - 1,531 7,772 - 1,536,263 573,325 359,583 311,189 18,014 - 2,798,374 Represent assets and liabilities for which does not have a maturity date 134
114. As of and for the Year Ended 31 December 2021 (Currency: Thousands of Euros) GarantiBank International N.V. Financial Statements Country by country reporting In line with Article 89 of the Capital Requirements Directives (CRD IV), the information on country-bycountry reporting is as follows: 31 December 2021 Name GarantiBank International N.V., Head Office Country The Netherlands Amsterdam Germany Dusseldorf GarantiBank International Dusseldorf Branch 31 December 2020 Name GarantiBank International N.V., Head Office GarantiBank International Dusseldorf Branch Location The Netherlands Amsterdam Germany Dusseldorf Turnover Average number of FTE 66,823 208 2,812 Result before Tax Tax on result Public subsidies received 23,925 6,224 - 16 462 152 - 53,002 223 8,840 2,412 - 3,304 17 547 171 - Next to the abovementioned countries GBI also has representative offices in Turkey and Switzerland. These offices do not perform any activities themselves. All transactions are recorded by GBI’s Head Office or GBI’s branch in Germany. Subsequent Events From 1 January 2022 to the date when these financial statements was authorized, no other events have occurred that significantly affect GBI’s earnings or its equity position, and that are not mentioned in the notes to the financial statements. Amsterdam, 23 February 2022 The Managing Board: Mr S.E. Zeyneloǧlu Mr M.Ö. Şişman Mr M. Witteveen Mr C.B. Mutlu The Supervisory Board: Mr. R. Baştuğ (Chairman) Mr A. Düren (Vice Chairman) Mr P.R.H.M. van der Linden Ms M.A. Halverhout Mr. J.H. de Roo 135
115. OTHER INFORMATION Provisions in the Articles of Association governing the appropriation of profit The profit appropriation has been proposed in conformity with article 31 of the Articles of Association , which states: 45. Article 31 1. The profits shall be at the disposal of the general meeting. 2. Dividends may be paid only up to an amount which does not exceed the amount of the distributable part of the net assets. 3. Dividends shall be paid after adoption of the financial statements from which it appears that payment of dividends is permissible. The general meeting may resolve to pay an interim dividend provided the requirement of the second paragraph has been complied with as shown by interim accounts drawn up in accordance with the provision of the law. 4. The general meeting may, subject to due observance of the provision of paragraph 2, resolve to make distributions to the charge of any reserve which need not be maintained by virtue of the law. Independent auditor’s report The independent auditor’s report is set forth on the following pages. 136
116. Independent auditor ’s report To: the General Meeting of Shareholders and the Supervisory Board of GarantiBank International N.V. A. Report on the audit of the financial statements 2021 included in the annual report Our opinion We have audited the financial statements 2021 of GarantiBank International N.V. (‘the company’) based in Amsterdam. WE HAVE AUDITED The financial statements comprise: 1. the statement of financial position as at 31 December 2021; 2. the following statements for 2021: the statements of comprehensive income, changes in equity and cash flows; and 3. the notes comprising a summary of the significant accounting policies and other explanatory information. OUR OPINION In our opinion, the accompanying financial statements give a true and fair view of the financial position of GarantiBank International N.V. as at 31 December 2021 and of its result and its cash flows for 2021 in accordance with International Financial Reporting Standards as adopted by the European Union (EU-IFRS) and with Part 9 of Book 2 of the Dutch Civil Code. Basis for our opinion We conducted our audit in accordance with Dutch law, including the Dutch Standards on Auditing. Our responsibilities under those standards are further described in the ‘Our responsibilities for the audit of the financial statements’ section of our report. We are independent of GarantiBank International N.V. in accordance with the EU Regulation on specific requirements regarding statutory audit of public-interest entities, the “Wet toezicht accountantsorganisaties” (Wta, Audit firms supervision act), the “Verordening inzake de onafhankelijkheid van accountants bij assurance-opdrachten” (ViO, Code of Ethics for Professional Accountants, a regulation with respect to independence) and other relevant independence regulations in the Netherlands. Furthermore, we have complied with the “Verordening gedrags- en beroepsregels accountants” (VGBA, Dutch Code of Ethics). We believe the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. B. Information in support of our opinion We designed our audit procedures in the context of our audit of the financial statements as a whole and in forming our opinion thereon. The following information in support of our opinion was addressed in this context, and we do not provide a separate opinion or conclusion on these matters. 137
117. Materiality Based on our professional judgement we determined the materiality for the financial statements as a whole at € 5,000,000. The materiality is based on a benchmark of total equity (representing 0.8% of reported total equity) which we consider to be one of the principal considerations for stakeholders of the company in assessing the financial performance of the company. We have also taken into account misstatements and/or possible misstatements that in our opinion are material for the users of the financial statements for qualitative reasons. We agreed with the Supervisory Board that misstatements in excess of € 250,000, which are identified during the audit, would be reported to them, as well as smaller misstatements that in our view must be reported on qualitative grounds. Audit Approach fraud risks and non-compliance with laws and regulations We identified and assessed the risks of material misstatements of the financial statements due to fraud and non-compliance with laws and regulations. During our audit we obtained an understanding of the company and its environment and the components of the system of internal control, including the risk assessment process and management’s process for responding to the risks of fraud and monitoring the system of internal control and how the supervisory board exercises oversight, as well as the outcomes. We evaluated the design and relevant aspects of the system of internal control and in particular the fraud risk assessment, as well as among others the code of conduct, whistle blower procedures and incident registration. We evaluated the design and the implementation and, where considered appropriate, tested the operating effectiveness, of internal controls designed to mitigate fraud risks. As part of our process of identifying fraud risks, we evaluated fraud risk factors with respect to financial reporting fraud, misappropriation of assets and bribery and corruption. We evaluated whether these factors indicate that a risk of material misstatement due fraud is present. In all of our audits, we address the risk of management override of internal controls, including evaluating whether there was evidence of bias by management that may represent a risk of material misstatement due to fraud. Relating to the use of estimates for the expected credit loss we refer to section 'Use of estimates and judgement' on page 31 and Note 31 ‘Approach expected credit loss of financial assets’ of the financial statements. For the performed specific procedures we refer to the key audit matters on the expected credit loss (collective provision and individual provision). Relating to the risk of fraud and non-compliance with laws and regulations we performed the following specific procedures: ▪ We inspected minutes of the meetings of several committees within GarantiBank International N.V. among which the Supervisory Board and the Managing Board. ▪ We obtained sufficient appropriate audit evidence regarding compliance with the provisions of those laws and regulations generally recognized to have a direct effect on the determination of material amounts and disclosures in the financial statements, where we also included a specialist in the area of corporate tax law. ▪ Relating to other laws and regulations we performed the following procedures: ▪ We made inquiries with relevant personnel, including the Managing Board, the Internal Audit Department, Head of Legal and the Chief compliance officer regarding compliance with laws and regulations. ▪ We inspected minutes of the meetings of several committees within GarantiBank International among which the Supervisory Board and the Managing Board. ▪ We inspected correspondence with regulators (Dutch Authority for the Financial Markets (AFM), Dutch Central Bank (DNB) and Federal Financial Supervisory Authority (BaFin)). ▪ We inspected the register of complaints. 138
118. We used specialists to test the design and existence of anti-money laundering and countering the financing of terrorism (AML/CFT) procedures through interviews, a documentation study and walkthroughs. We evaluated the design and the implementation and, where considered appropriate, tested the operating effectiveness of internal controls that mitigate fraud risks. Supplementary to reliance on the internal controls, we performed substantive audit procedures, including detailed testing of journal entries with a risk-based approach. We remained alert for indications of fraud throughout our other audit procedures and evaluated whether identified findings or misstatements were indicative of fraud. We assessed matters reported on the company’s whistleblowing and complaints procedures with the entity and assessed, where deemed necessary, results of management ’s follow-up of such matters. We reviewed significant accounting estimates, specifically those relating to the expected credit loss provision, for biases and evaluated whether the circumstances producing the bias, if any, represent a risk of material misstatement due to fraud. For more information, please refer to our Key Audit Matters. We obtained written representations that all known instances of (suspected) fraud or noncompliance with laws and regulations have been disclosed to us. ▪ ▪ ▪ ▪ ▪ ▪ ▪ We incorporated elements of unpredictability in our audit. We also considered the outcome of our other audit procedures and evaluated whether any findings were indicative of fraud or non-compliance. We considered available information and made enquiries of relevant executives (including internal audit, legal, compliance), Management Board and the Supervisory Board. The above mentioned risk assessment and audit approach did not lead to indications of potential material misstatements due to fraud. Our key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements. We have communicated the key audit matters to the Supervisory Board. The key audit matters are not a comprehensive reflection of all matters discussed. These matters were addressed in the context of our audit of the financial statements as a whole and in forming our opinion thereon, and we do not provide a separate opinion on these matters. EXPECTED CREDIT LOSS – COLLECTIVE ALLOWANCE We consider the valuation of the portfolio of Ioans and advances to customers and banks as disclosed in note 4 and 5 of the financial statements, combined representing in total 76% of the balance sheet total, a key audit matter. The carrying amount of the portfolio of Ioans and advances to customers and banks that are collectively assessed amounts to € 3.1 billion. The allowance for these collective assessed expected credit losses amounts to € 14.4 million. The company uses Expected Credit Loss (‘ECL’) modeIs for the ECL calculations for the portfolio of Ioans and advances to customers and banks as a whole. The ECL model is a forward-looking model that takes OUR AUDIT APPROACH We have performed the following audit procedures to mitigate the risk: ▪ We evaluated the design and tested the operating effectiveness of the internal controls relating to the ECL collective allowance process. ▪ We involved credit risk professionals with specialised skills and knowledge who assisted in evaluating the assumptions to determine the PD, LGD, and EAD parameters in models used by the Company to determine the collective allowances, and assessed management overlays recorded to the ECL. 139
119. into consideration expected future developments with respect to the ProbabiIity of Default , Loss Given DefauIt and Exposures at Default. ▪ ▪ We identified this as a key audit matter as several aspects of the accounting for Ioan Iosses require significant judgment of management. The COVID-19 pandemic has meant that assumptions regarding the economic outlook are more uncertain which, combined with varying government responses, increases the Ievel of judgement required by the company in determining the ECL aIIowances. ▪ ▪ Additionally we identified this as a key audit matter due to the size of the loans issued and advances to customers provided and due to the material impact a possible impairment may have on the income statement. We assessed the company’s methodology to determine the macroeconomic forecasts used in the ECL. We evaluated the identification of significant increase in credit risk (‘SICR’) in loans by challenging the scope of management’s criteria used in staging assessments, the thresholds applied within each criterion, and the ability of staging criteria to identify SICR prior to loans being credit impaired. We performed back-testing of certain models to evaluate current model performance. We assessed the adequacy and appropriateness of the disclosures related to ECL collective allowances within the financial statements. Key judgmental areas include the identification of loans that experienced a significant increase in credit risk, the forecasting of forward looking economic guidance for use in ECL models, the modelling of assumptions and parameters, and the use of manual, post-model adjustments to reflect risks not captured in models for financial reporting (if any). Initially, Ioans and advances to customers and banks are recognized at its fair value and subsequently carried at amortized cost using the effective interest method. Management recognized the expected credit loss allowance with regard to the loans issued to Ioans and advances to customers and banks in accordance with IFRS 9. EXPECTED CREDIT LOSS – SPECIFIC ALLOWANCE We consider the valuation of the portfolio of Ioans and advances to customers as disclosed in note 5 of the financial statements, representing in total 61% of the balance sheet total, a key audit matter. The carrying amount of the portfolio of Ioans and advances to customers that are individually assessed amounts to OUR AUDIT APPROACH We have performed the following audit procedures to mitigate the risk: ▪ We evaluated the design and implementation of the internal controls relating to the ECL specific allowance process. ▪ We examined the methodologies, cash flows and collateral values 140
120. € 47.1 million. The allowance for individually assessed expected credit losses amounts to € 16.0 million. For creditimpaired exposures (Stage 3) and exposure with significant increase in credit risk greater than € 10.0 miIIion, the company determines the ECL aIlowance individually. We identified this as a key audit matter as several aspects of the accounting for Ioan Iosses require significant judgment of the Management Board. Additionally we identified this as a key audit matter due to the size of the loans issued and advances provided and due to the material impact a possible impairment may have on the income statement. Key judgmentaI areas include the identification of loans that are underperforming or credit-impaired, the amount of recovery cash flows, including expected collateral recovery, and the probability weights applied to different recovery scenarios for these individually assessed loans. Initially, Ioans and advances to customers are recognized at its fair value and subsequently carried at amortized cost using the effective interest method. The Managing Board recognized the expected credit loss provision with regard to the loans issued to Ioans and advances to customers in accordance with IFRS 9. RELIABILITY AND CONTINUITY OF ELECTRONIC DATA PROCESSING The processes within the company are largely automated. As a result, the company is highly dependent on the reliability and continuity of the automated data processing for the continuity of its processes. For this reason, we consider this a key point in our audit. ▪ ▪ ▪ ▪ used in expected future recovery cash flow assessments of specific loan allowances for impaired loans. We challenged management’s use of recovery scenarios and expected cash flows considering industry trends and comparable benchmarks, and recalculated recovery amounts. We evaluated the competence, capabilities and objectivity of the valuation experts, appointed by management, that were involved in the valuation of collaterals. We performed back-testing procedures by evaluating historical sales of collaterals. We assessed the adequacy and appropriateness of the disclosures related to ECL specific allowances within the financial statements. OUR AUDIT APPROACH The general IT controls for the applications that are relevant to our audit have been tested for design, existence and effectiveness by IT specialists who are part of the audit team. The design, existence and effectiveness of the general IT controls and application controls were tested by conducting interviews, performing walkthroughs, assessing third-party reports from parties to whom parts of the automated environment have been outsourced. 141
121. C . Report on other information included in the annual report In addition to the financial statements and our auditor’s report thereon, the annual report contains other information that consists of:  the chapter ‘Who we are’;  the report of the Managing Board;  the chapter Corporate Governance;  the report of the Supervisory Board;  other information as required by Part 9 of Book 2 of the Dutch Civil Code. Based on the following procedures performed, we conclude that the other information:  is consistent with the financial statements and does not contain material misstatements;  contains the information as required by Part 9 of Book 2 of the Dutch Civil Code. We have read the other information. Based on our knowledge and understanding obtained through our audit of the financial statements or otherwise, we have considered whether the other information contains material misstatements. By performing these procedures, we comply with the requirements of Part 9 of Book 2 of the Dutch Civil Code and the Dutch Standard 720. The scope of the procedures performed is substantially less than the scope of those performed in our audit of the financial statements. The Managing Board is responsible for the preparation of the other information, including the Managing Board report in accordance with Part 9 of Book 2 of the Dutch Civil Code and other information as required by Part 9 of Book 2 of the Dutch Civil Code. D. Report on other legal and regulatory requirements Engagement We were engaged by the Supervisory Board as auditor of GarantiBank International N.V. on 17 February 2021, as of the audit for financial year 2021. No prohibited non-audit services We have not provided prohibited non-audit services as referred to in Article 5(1) of the EU Regulation on specific requirements regarding statutory audit of public-interest entities. E. Description of responsibilities regarding the financial statements Responsibilities of the Managing Board and the Supervisory Board for the financial statements The Managing Board is responsible for the preparation and fair presentation of the financial statements in accordance with EU-IFRS and Part 9 of Book 2 of the Dutch Civil Code. Furthermore, the Managing Board is responsible for such internal control as the Managing Board determines is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error. 142
122. As part of the preparation of the financial statements , the Managing Board is responsible for assessing the company’s ability to continue as a going concern. Based on the financial reporting frameworks mentioned, the Managing Board should prepare the financial statements using the going concern basis of accounting, unless the Managing Board either intends to liquidate the company or to cease operations, or has no realistic alternative but to do so. The Managing Board should disclose events and circumstances that may cast significant doubt on the company’s ability to continue as a going concern in the financial statements. The Supervisory Board is responsible for overseeing the company’s financial reporting process. Our responsibilities for the audit of the financial statements Our objective is to plan and perform the audit engagement in a manner that allows us to obtain sufficient and appropriate audit evidence for our opinion. Our audit has been performed with a high, but not absolute, level of assurance, which means we may not detect all material errors and fraud during our audit. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. The materiality affects the nature, timing and extent of our audit procedures and the evaluation of the effect of identified misstatements on our opinion. We have exercised professional judgement and have maintained professional scepticism throughout the audit, in accordance with Dutch Standards on Auditing, ethical requirements and independence requirements. Our audit included among others:  Identifying and assessing the risks of material misstatement of the financial statements, whether due to fraud or error, designing and performing audit procedures responsive to those risks, and obtaining audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.  Obtaining an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.  Evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.  Concluding on the appropriateness of management’s use of the going concern basis of accounting, and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause a company to cease to continue as a going concern.  Evaluating the overall presentation, structure and content of the financial statements, including the disclosures.  Evaluating whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. 143
123. We communicate with the Supervisory Board regarding , among other matters, the planned scope and timing of the audit and significant audit findings, including any significant findings in internal control that we identify during our audit. In this respect we also submit an additional report to the audit committee in accordance with Article 11 of the EU Regulation on specific requirements regarding statutory audit of public-interest entities. The information included in this additional report is consistent with our audit opinion in this auditor’s report. We provide the Supervisory Board with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the Supervisory Board, we determine the key audit matters: those matters that were of most significance in the audit of the financial statements. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, not communicating the matter is in the public interest. Amstelveen, 23 February 2022 For and on behalf of BDO Audit & Assurance B.V., sgd. drs. M.F. Meijer RA 144 AA22-0261