Half-year Report

JOINT STOCK COMMERCIAL BANK

"UZBEK INDUSTRIAL AND CONSTRUCTION BANK" AND ITS SUBSIDIARIES

TABLE OF CONTENTS

STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE Interim condensed consolidated Financial Information for THE six MONTHS ended

30 June 2020 (UNAUDITED) 1

REPORT ON REVIEW OF INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION 2

INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION FOR THE SIX MONTHS ENDED 30 JUNE 2020 (UNAUDITED):

Interim condensed consolidated statement of financial position (unaudited) 3

Iinterim condensed consolidated statement of profit or loss and other comprehensive income (unaudited) 4

Interim condensed consolidated statement of changes in equity (unaudited) 5

Interim condensed consolidated statement of cash flows (unaudited) 6

Selected explanatory notes to the interim condensed consolidated financial information (unaudited) 7-46

JOINT STOCK COMMERCIAL BANK

"UZBEK INDUSTRIAL AND CONSTRUCTION BANK" AND ITS SUBSIDIARIES

STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION

Management is responsible for the preparation of the interim condensed consolidated financial information that presents fairly the interim condensed consolidated statement of financial position of Joint Stock Commercial Bank "Uzbek Industrial and Construction Bank" ("the Bank") and its subsidiaries (collectively - "the Group") as at 30 June 2020, and the related interim condensed consolidated statements of profit or loss and other comprehensive income, changes in equity and cash flows for the six months then ended, and selected explanatory notes, in accordance with International Accounting Standard 34 "Interim Financial Reporting" ("IAS 34").

In preparing the interim condensed consolidated financial information, management is responsible for:

· Properly selecting and applying accounting policies;

· Presenting information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

· Providing additional disclosures when compliance with the specific requirements in IAS 34 are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group's consolidated financial position and financial performance; and

· Making an assessment of the Group's ability to continue as a going concern.

Management is also responsible for:

· Designing, implementing and maintaining an effective and sound system of internal controls, throughout the Group;

· Maintaining adequate accounting records that are sufficient to show and explain the Group's transactions and disclose with reasonable accuracy at any time the consolidated financial position of the Group, and which enable them to ensure that the interim condensed consolidated financial information of the Group comply with IAS 34;

· Maintaining accounting records in compliance with the Republic of Uzbekistan legislation;

· Taking such steps as are reasonably available to them to safeguard the assets of the Group; and

· Detecting and preventing fraud and other irregularities.

The interim condensed consolidated financial information of the Group for the six months ended30 June 2020 was authorized for issue by the Management Board on 27 November 2020.

On behalf of the Management Board:

27 November 2020 27 November 2020

Tashkent, Uzbekistan Tashkent, Uzbekistan

JOINT STOCK COMMERCIAL BANK

"UZBEK INDUSTRIAL AND CONSTRUCTION BANK" AND ITS SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 30 JUNE 2020 (UNAUDITED)

Approved for issue and signed on behalf of the Management Board on 27 November 2020.

Approved for issue and signed on behalf of the Management Board on 27 November 2020.

*Dividends paid in advance to Ministry of Finance in accordance with the Presidential Decree PP-4679 "On measures to provide stability of state budget of the Republic of Uzbekistan and timely financing of priority actions during the coronavirus pandemic". These dividends are to be offset by future dividend declaration.

Approved for issue and signed on behalf of the Management Board on 27 November 2020.

Approved for issue and signed on behalf of the Management Board on 27 November 2020.

1. INTRODUCTION

The Bank is a Joint Stock Company set up in accordance with Uzbekistan legislation.

The Bank was incorporated in 1991 and is domiciled in the Republic of Uzbekistan. It is registered in Uzbekistan to carry out banking and foreign exchange activities and has operated under the banking license #17 issued by the Central bank of Uzbekistan ("CBU") on 21 October 2017 (succeeded the licenses #17 issued on 25 January 2003 and #25 issued on 29 January 2005 by the CBU for banking operations and general license for foreign currency operations, respectively).

Principal activity. The Bank's principal activity is commercial banking, retail banking, operations with securities, foreign currencies and origination of loans and guarantees. The Bank accepts deposits from legal entities and individuals, extended loans, and transfer payments. The Bank conducts its banking operations from its head office in Tashkent and 45 branches within Uzbekistan as of 30 June 2020 (31 December 2019: 45 branches).

The Bank participates in the state deposit insurance scheme, which was introduced by the Uzbek Law #360-II "Insurance of Individual Bank Deposit" on 5 April 2002. On 28 November 2008, the President of Uzbekistan issued the Decree #PD-4057 stating that in case of the withdrawal of a license of a bank, the State Deposit Insurance Fund guarantees repayment of 100% of individual deposits regardless of the deposit amount.

As at 30 June 2020 (unaudited), the number of Bank's employees was 3 813 (31 December 2019: 3,902).

Registered address and place of business. 3, Shakhrisabzskaya Street, Tashkent, 100000, Uzbekistan

At 30 June 2020 and 31 December 2019, the Group consolidated the following companies in these consolidated financial statements: 

During 2020, the Group established new subsidiaries SQB Securities, SQB Construction and Urganch Texnopark companies, and acquired Zomin Non SQB, Zarbdor Non SQB. Zomin Non SQB, Zarbdor Non SQB and Urganch Texnopark companies were acquired and established exclusively for resale and as at 30 June 2020, the Group classified the investments as non-current assets held for sale described in Note 13.

The table below represents the interest of the shareholders in the Bank's share capital as at 30 June 2020 and 31 December 2019:

According to the Presidential Decree #4478 dated 9 October 2019, shares of the State Assets Management Agency of the Republic of Uzbekistan in the Bank were transferred to the Ministry of Finance of the Republic of Uzbekistan in order to ensure an effective transformation of the Bank's business model for subsequent privatization.

2. OPERATING ENVIRONMENT OF THE GROUP

Operating Environment. Uzbekistan economy displays characteristics of an emerging market, including but not limited to, a currency that is not freely convertible outside of the country and a low level of liquidity in debt and equity markets. Also, the banking sector in Uzbekistan is particularly impacted by local political, legislative, fiscal and regulatory developments. The largest Uzbek banks are state-controlled and act as an arm of Government to develop the country's economy. The Government distributes funds from the country's budget, which flow through the banks to various government agencies, and other state and privately owned entities.

Economic stability in Uzbekistan is largely dependent upon the effectiveness of economic measures undertaken by the Government, together with other legal, regulatory and political developments, all of which are beyond the Bank's control.

The Bank's financial position and operating results will continue to be affected by future political and economic developments in Uzbekistan including the application and interpretation of existing and future legislation and tax regulations which greatly impact Uzbek financial markets and the economy overall.

In addition to that, starting from early 2020 a new coronavirus disease (COVID-19) has begun rapidly spreading all over the world resulting in announcement of the pandemic status by the World Health Organization in March 2020. Responses put in place by many countries to contain the spread of COVID-19 are resulting in significant operational disruption for many companies and have significant impact on global financial markets. As the situation is rapidly evolving it has a significant effect on business of many companies across a wide range of sectors, including, but not limited to such impacts as disruption of business operations as a result of interruption of production or closure of facilities, supply chain disruptions, quarantines of personnel, reduced demand and difficulties in raising financing. In addition, the Group has already started to face the increasingly broad effects of COVID-19 as a result of its negative impact on the global economy and major financial markets.

In June 2020, S&P Global Ratings revised Uzbekistan's rating outlook from stable to negative. The decision was made due to rapid rise in the country's external and fiscal debt, partly due to USD 1 billion (UZS 10,173,380 million at the exchange rate prevailing as at the reporting date) in additional government spending in response to the coronavirus pandemic. In addition, in April and September 2020, the CBU reduced the refinancing rate from 16% to 15% and from 15% to 14%, respectively.

As at 30 June 2020, these changes in the economic environment have significantly impacted the operations of the Group through increased charges for ECL and further effects of COVID-19 on the Group's business largely depends on the duration and the incidence of the pandemic effects on the world and Uzbekistan economy. The Group continues to monitor the situation and intends to adapt strategies as needed to continue to drive the business and meet obligations.

Management of the Group is monitoring developments in the current environment and taking the following measures, it considers necessary in order to support the sustainability and development of the Group's business in the foreseeable future:

- Towards the end of Q1 2020, the Group has implemented remote work arrangements and restricted business travel effective mid-March.

- Based on application of customers, the Group has also provided holidays till end of Q3 2020 for repayment of interest and/or principal of loans.

- Expanded offering of banking products through digital and distance channels, which were previously provided exclusively at the Bank's branches.

3. BASIS OF PRESENTATION

Accounting basis

The interim condensed consolidated financial information of the Group has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting". The interim condensed consolidated financial information is unaudited and does not include all the information and disclosures required in the annual financial statements. The Group omitted disclosures, which would substantially duplicate the information contained in its audited annual consolidated financial statements for the year ended 31 December 2019 prepared in accordance with International Financial Reporting Standards ("IFRS"), such as accounting policies and details of accounts, which have not changed significantly in amount or composition. Additionally, the Group has provided disclosures where significant events have occurred subsequent to the issuance of the Group's annual consolidated financial statements for the year ended 31 December 2019 prepared in accordance with IFRS. Management believes that the disclosures in this interim condensed consolidated financial information are adequate to make the information presented not misleading if this interim condensed consolidated financial information is read in conjunction with the Group's annual consolidated financial statements for the year ended 31 December 2019 prepared in accordance with IFRS. In management's opinion, this interim condensed consolidated financial information reflects all adjustments necessary to present fairly the Group's financial position, results of operations, statements of changes in shareholders' equity and cash flows for the interim reporting periods.

This interim condensed consolidated financial information is presented in millions of Uzbek Soums ("UZS"), except for earnings per share amounts and unless otherwise indicated.

4. SIGNIFICANT ACCOUNTING POLICIES

Going concern. These consolidated financial statements have been prepared on the assumption that the Group is as a going concern and will continue in operation for the foreseeable future.

The Group's activities continue to be affected by the uncertainty and instability of the current economic environment. The financial position and the results of the Bank continue to be significantly impacted by the reforms of the new government, including those directed at increasing living standards, incomes, and job opportunities in rural regions.

For the six months ended 30 June 2020 (unaudited), the Group had a cash outflow from operating activities mainly as a result of on-lending the funds received from international financial institutions and the State to finance the government and investment projects increasing the loans and advances to customers by 20%.

As at 30 June 2020, the Bank was in a breach of cost-to-income ratio stipulated in the tripartite subsidiary loan agreements between the Republic of Uzbekistan, the Rural Restructuring Agency and the Bank #3471-UZB from April 2017 and #3673-UZB from November 2018 as discussed in detail in Note 16. On 5 November 2019, the Republic of Uzbekistan confirmed to the Bank in writing that it would not take any action to demand prepayment of the loans advanced to the Bank under the Subsidiary Loan Agreements as a consequence of past and/or on-going non-compliance with this covenant. In addition, the agreement between the Bank and Ministry of Finance does not provide a definition of an event of default. Therefore the Management considers the breach of the covenant not to be an event of default and is currently in discussions with Ministry of Finance on receiving a letter confirming that this breach of the covenant is not considered to be an event of default.

As at 30 June 2020, the Group had a cumulative liquidity shortfall of UZS 1,860,134 million up to one month (Note 28), which reflects the effects of the decision to classify UZS 456,356 million as "demand and less than 1 month" as a result of the non-compliance with the covenant.

The Management believes that the Group will be able to continue as a going concern for the foreseeable future based on the following:

· Continued ongoing support by the Government of the Republic of Uzbekistan ("the State"). The Group is a state owned bank with the Ministry of Finance and UFRD as key shareholders, jointly holding 94.86% interest in the share capital of the Bank. The Group is a strategic financial institution of the Republic of Uzbekistan, responsible for the development of strategic industries.

· The Bank plays a vital role as a government arm/vehicle to channel the State funds to the strategic sectors of the economy of Uzbekistan. The Management believes that in spite of a substantial portion of customer accounts being on demand, the fact that significant portion of these customer accounts are of large State controlled entities which are either the Group's shareholders or its entities under common control and the past experience of the Group, indicate that these customer accounts provide a long-term and stable source of funding for the Group. As at 30 June 2020 (unaudited), total current accounts and borrowings with maturities up to one year of the State and State controlled entities amounted to UZS 2,917,012 million. As at 30 June 2020 (unaudited) borrowings of the Group from the State amounted to UZS 4,598,472 million. Should the Group's liquidity position require more funding, the Group's Management believes that the terms of the State borrowings and deposits of the State controlled entities could be re-negotiated. The Group's cumulative liquidity position up to one year adjusted for exclusion of the State borrowings and deposits of the State controlled entities would result in positive cumulative liquidity gap in the amount of UZS 757,397 million.

· On the basis of the Presidential Decree #5978 dated 4 March 2020 "On additional measures to support the population, sectors of the economy and business entities during the coronavirus pandemic" commercial banks were provided with additional liquid resources in the amount of UZS 2,600,000 million by means of easing the requirements for mandatory reserves and implementation of special mechanism on the part of the Central Bank of Uzbekistan for providing liquidity to commercial banks up to UZS 2,000,000 million with a term of up to 3 years. The Bank has the opportunity to use the funds that appeared due to the simplification of requirements.

· During 2020, the Bank signed a loan agreement with ICBC Standard Bank PLC to attract a credit line in the equivalent of USD 100 million for the purpose of financing the acquisition of modern equipment and updating the technological base in production processes, as well as replenishing the raw material base of business entities. The Bank has also attracted an unsecured synthetic loan of USD 50 million from the investment management company Daryo Finance B.V. for financing the small- and medium-sized enterprises (SMEs), USD 40 million from European Bank for Reconstruction and Development, as well as USD 20 million loan from OPEC Fund for International Development (the OPEC Fund) to support the trade finance requirements of SMEs in different sectors such as agriculture, healthcare, construction and textiles.

· Subsequent to the reporting date the Bank and Credit Suisse AG agreed to increase credit line extended to the Bank by USD 150 million to finance the development of wholesale and retail trade sector in the Republic of Uzbekistan.

· As at 30 June 2020, deposits of state entities callable within one year amounted to UZS 2,917,011 million and borrowings from the State and state entities with the same maturity amounted to UZS 1,085,029 million (total UZS 4,002,040 million).

· The Management regularly assesses the stability of its customer accounts funding base, in particular with respect to that of non-state entities, based on past performance and analysis of the events subsequent to the reporting date. The Management believes that the customers intend to hold their term deposits with the Group, and that this source of funding will remain at a similar level for the foreseeable future.

The Management is not aware of any circumstances that would question the continuation of the Group and considers that all operations will proceed in the normal course of business, with the State retaining the strategic control at least until 2022 as planned in the "Strategy for reforming of the banking system of the Republic of Uzbekistan for 2020 to 2025". This strategy envisages the State's plan to make its shares in the Bank available for sale to strategic private investors.

5. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

In preparing this interim condensed consolidated financial information, the significant judgments made by the management in applying the Group's accounting policies and the key sources of estimation uncertainty were consistent with those that applied to the Group's annual consolidated financial statements for the year ended 31 December 2019 prepared in accordance with IFRS. There have been no changes to the basis upon which the significant accounting estimates have been determined compared with 31 December 2019, except for those disclosed in this Note below.

Measurement of allowances for expected credit losses ("ECL").

Almost all sectors of the economy of Uzbekistan, both in terms of individuals and legal entities, have been adversely affected by the unprecedented economic and social disruption resulting from Covid-19 which has led to significant government interventions and support. This has caused an increased level of uncertainty and volatility in the economic activity of Uzbekistan during Q2 2020.

In addition, currently limited observable data available to inform a supportable, fully-modelled view on how the economic impacts of this pandemic might affect customers has further exacerbated the ability of the banking sector of Uzbekistan to assess the levels of ECL. The Group incorporates forward-looking information into a measurement of ECL when there is a statistically proven correlation between the macro-economic variables and the NPL. As at the reporting date, statistical tests have failed and ECL across all loan portfolios has not been adjusted for forward-looking information and macroeconomic scenarios. The Management updates its statistical tests for correlation as at each reporting date.

Therefore, due to the increased risk and uncertainties at this time to incorporate the specific effects of the pandemic and the related government support measures, the Management of the Group considered to apply additional overlay in measuring the ECL by introducing the following adjustments in its methodology.

As discussed in Note 10, in line with the government resolution, the Group has provided the borrowers with holidays till the end of Q3 2020 for repayment of interest and/or principal on loans with the outstanding balance of nearly 36% of the total loan portfolio as at 30 June 2020 (unaudited).

The calculation of the PD rates applied across all portfolios (state and municipal organisations, corporate loans) of the Group except for loans with government guarantees was based on the Management's assumption that the payment holidays granted during the lockdown were the evidence of a significant increase in credit risk (SICR). However, the Management is of the view that the actual default rates could materialize to be lower as the customers with government guarantees will continue to receive government support to meet their obligations.

As a result of the assumptions used above the PD rates across all portfolios have been adjusted to reflect the increased credit risk by classifying all Stage 1 loans restructured due to the effects of the pandemic (except for loans with government guarantees) as Stage 2 and all restructured Stage 2 loans that were classified as Stage 3 as at 31 December 2019, have been adjusted as Stage 3. But in measuring the ECL, as at 30 June 2020, the Management has applied an overlay by moving these restructured loans back to their original stages applied before their restructuring.

Additional overlay was applied to the restructured loans that have government guarantees as a collateral by retaining their pre-pandemic staging and assuming that restructuring is not an automatic evidence of significant increase in their credit risk. The basis for this overlay was that the Management believes the government will continue to support these borrowers to meet their obligations. As such, the restructuring that took place during the period of the pandemic in this category of customers did not automatically move them to Stage 2 for a life-time loss calculation.

The Management has also adjusted the calculation of loss given default rates (LGD) by excluding the loan recovery results of the second quarter of 2020, assuming the recovery pattern during the lockdown period does not accurately reflect the financial performance of the borrowers. Cash flows and turnover of customer accounts observed during pre and post quarantine periods suggest that significant slow-down in the recovery of loans were mainly attributable to factors other than the financial standing of the borrowers. This adjustment to LGD has been applied across all portfolios of the Group.

The Management will closely monitor the servicing of the loan portfolio to assess the adequacy of the overlay starting from 1 October 2020, and update the ECL measurement as more information becomes available to support an update, incorporating alternative economic scenarios.

Changes in judgements and assumptions could result in a material adjustment to those estimates in the next reporting periods.

6. APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS IFRSs)

The following amended standards and interpretations became effective for the Group from 1 January 2020, but did not have any significant impact on the Group's interim condensed consolidated financial information for the six months ended 30 June 2020: 

· Amendments to IFRS 3 Definition of a business;

· Amendments to IAS 1 and IAS 8 Definition of material;

· Amendments to References to the Conceptual Framework in IFRS Standards.

The Group did not early adopt any other standards, amendments or interpretations that have been issued and are not yet effective.

7. SEGMENT REPORTING

The Group's operations are a single reportable segment.

The Group provides mainly banking services in the Republic of Uzbekistan. The Group identifies the segment in accordance with the criteria set in IFRS 8 "Operating Segments" and based on the way the operations of the Group are regularly reviewed by the chief operating decision maker to analyse performance and allocate resources among business units of the Group.

The chief operating decision-maker ("CODM") has been determined as the Group's Chairman of the Management Board. The CODM reviews the Group's internal reporting in order to assess performance and allocate resources. The Management has determined a single operating segment being banking services based on these internal reports.

8. CASH AND CASH EQUIVALENTS

The credit quality of cash and cash equivalents at 30 June 2020 (unaudited) is as follows: 

The credit quality of cash and cash equivalents at 31 December 2019 is as follows:

9. DUE FROM OTHER BANKS

Due to the effect of the pandemic, the commercial banks of Uzbekistan were provided with additional liquid resources as a result of easing the requirements for mandatory reserves with CBU. This measure has allowed the Bank to enjoy additional liquidity that it could use to fund its operations.

Restricted cash represents balances on correspondent accounts with foreign banks placed by the Group on behalf of its customers. The Group does not have the right to use these funds for the purpose of funding its own activities.

Analysis by credit quality of due from other banks outstanding at 30 June 2020 (unaudited) is as follows:

Analysis by credit quality of due from other banks outstanding at 31 December 2019 is as follows:

Mandatory deposits with the CBU include non-interest bearing reserves against client deposits. The Group does not have the right to use these deposits for the purposes of funding its own activities. 

10. LOANS AND ADVANCES TO CUSTOMERS

The Bank uses the following classification of loans:

· Loans to state and municipal organisations - loans issued to clients wholly owned by the Government of the Republic of Uzbekistan and budget organisations;

· Corporate loans - loans issued to clients other than government entities and private entrepreneurs;

· Loans to individuals - loans issued to individuals for consumption purposes, for the purchase of residential houses and flats and loans issued to private entrepreneurs without forming legal entity.

Loans and advances to customers comprise:

In line with the Presidential Decree #5978 dated 3 April 2020, the Group has provided holidays till the end of Q3 2020 for repayment of interest and/or principal on loans with outstanding balance of 36% of the total loan portfolio which comprise 49% of the loans to legal entities, 37% of loans to individuals and nearly 20% of the loans state and municipal organisation as at 30 June 2020 (unaudited). As at the same date, the amount of principal, the repayment of which the Group has extended beyond Q3 2020, was UZS 284,000 million (7%) and UZS 2,308,000 million (12%) of the loans to legal entities and individuals, respectively.

In relation to restructured loans above, interest continued to accrue on the outstanding principal of the loans and was distributed over the remaining period of the loans with final maturities predominantly extended by six months.

Deterioration in Non-performing loans ("NPL") to gross loans and in NPL coverage ratios at 30 June 2020 was mainly driven by the increase in non-performing borrowers during the second quarter of 2020 on the back of COVID-19 pandemic outbreak. NPLs are loans in which the borrower is in default due to the fact that they have not made the scheduled payments for 90 days or more. The NPL is a measure of performance not defined by IFRS.

The following table presents information about NPLs as at 30 June 2020 and as at 31 December 2019:

The table below represents loans and advances to customer's classification by stages as at 30 June 2020 and 31 December 2019:

The tables below analyze information about significant changes in the gross carrying amount of loans and advances to customers during the six months ended 30 June 2020 (unaudited):

The tables below analyze information about significant changes in the gross carrying amount of loans and advances to customers during the year 2019:

* The line "Changes do to modification that did not result in derecognition" represents changes in EAD, such as Increase, decrease in EAD and transfer of new issued loans between stages. 

The tables below analyze information about significant changes in the expected credit loss of loans and advances to customers during the six months period ended 30 June 2020 (unaudited):

The tables below analyze information about significant changes in the gross carrying amount of loans and advances to customers during the year 2019:

Economic sector risk concentrations within the loans and advances to customer are as follows:

As at 30 June 2020, the Group granted loans to 10 (31 December 2019: 10) borrowers in the amount of UZS 10,947,912 million (31 December 2019: UZS 10,434,535 million), which individually exceeded 10% of the Group's equity.

Information about loans and advances to individuals as at 30 June 2020 and 31 December 2019 are as follows:

Information about collateral as at 30 June 2020 are as follows:

Information about collateral as at 31 December 2019 are as follows:

Analysis by credit quality of loans and advances to customers that are collectively and individually assessed for impairment as at 30 June 2020 is as follows:

Analysis by credit quality of loans to State and municipal organisations, Corporate and Individual customers that are collectively and individually assessed for impairment as at 31 December 2019 are as follows: