35. Fair Value of Financial Instruments
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:
- Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;
- Level 2: techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and
- Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.
The following tables show an analysis of financial instruments recorded at fair value by level of the fair value hierarchy:
| As at 31 December 2012 (In billions of Russian Roubles) | Level 1 | Level 2 | Level 3 | Total | ||
|---|---|---|---|---|---|---|
| Financial assets | ||||||
| Trading securities | 81.5 | 8.0 | 0.9 | 90.4 | ||
| Securities designated at fair value through profit or loss | 11.5 | 0.6 | 7.1 | 19.2 | ||
| Securities pledged under repurchase agreements | 677.9 | 4.3 | — | 682.2 | ||
| Investment securities available for sale | 734.3 | 52.1 | 18.1 | 804.5 | ||
| Derivative financial instruments | — | 52.2 | 22.2 | 74.4 | ||
| Total financial assets at fair value | 1,505.2 | 117.2 | 48.3 | 1,670.7 | ||
| Financial liabilities | ||||||
| Derivative financial instruments | — | 41.4 | 0.3 | 41.7 | ||
| Securties sold. not yet purchased | 15.9 | 2.7 | — | 18.6 | ||
| Structured notes | — | 1.3 | 1.0 | 2.3 | ||
| Total financial liabilities at fair value | 15.9 | 45.4 | 1.3 | 62.6 | ||
| As at 31 December 20121 (In billions of Russian Roubles) | Level 1 | Level 2 | Level 3 | Total |
|---|---|---|---|---|
| Financial assets | ||||
| Trading securities | 94.6 | 4.7 | 2.7 | 102.0 |
| Securities designated at fair value through profit or loss | 32.2 | 14.4 | 5.4 | 52.0 |
| Securities pledged under repurchase agreements | 163.0 | 0.7 | — | 163.7 |
| Investment securities available for sale | 842.6 | 27.6 | 14.3 | 884.5 |
| Derivative financial instruments | 2.3 | 25.3 | 23.6 | 51.2 |
| Total financial assets at fair value | 1,134.7 | 72.7 | 46.0 | 1,253.4 |
| Financial liabilities | ||||
| Securties sold, not yet purchased | 65.9 | 1.3 | 0.3 | 67.5 |
| Derivative financial instruments | 0.5 | 25.6 | 0.6 | 26.7 |
| Structured notes | 0.6 | — | 0.9 | 1.5 |
| Total financial liabilities at fair value | 67.0 | 26.9 | 1.8 | 95.7 |
Level 2 includes debt securities of first-class borrowers that are not actively traded on the market. Fair value of the securities was calculated using techniques for which all inputs which have a significant effect on the recorded fair value are observable. Financial characteristics of comparable financial instruments actively traded on the market were used as inputs for the fair valuation models.
The following table shows a reconciliation of the opening and closing amount of Level 3 financial assets and liabilities which are recorded at fair value as at 31 December 2012:
| In billions of Russian Roubles | At 1 January 2012 | Total gains reported in income statement | Foreign currency revaluation | Changes in fair value due to deferred gains | Purchases | Sales | Transfers from Level 3 | Transfers to Level 3 | At 31 December 2012 |
|---|---|---|---|---|---|---|---|---|---|
| Financial assets | |||||||||
| Trading securities | 2.7 | (0.5) | — | — | 0.5 | (1.9) | — | 0.1 | 0.9 |
| Securities designated at fair value through profit or loss | 5.4 | (2.3) | — | — | 7.6 | (0.5) | (3.5) | 0.4 | 7.1 |
| Investment securities available for sale | 14.3 | — | — | — | 5.3 | (1.5) | — | — | 18.1 |
| Derivative financial instruments | 23.6 | 3.3 | (2.1) | 0.2 | 0.1 | (2.9) | — | — | 22.2 |
| Total level 3 financial assets | 46.0 | 0.5 | (2.1) | 0.2 | 13.5 | (6.8) | (3.5) | 0.5 | 48.3 |
| Financial liabilities | |||||||||
| Structured notes | 0.9 | — | — | — | 0.1 | — | — | — | 1.0 |
| Derivative financial instruments | 0.6 | (0.6) | — | — | 0.3 | — | — | — | 0.3 |
| Securties sold, not yet purchased | 0.3 | (0.3) | — | — | — | — | — | — | — |
| Total level 3 financial liabilities | 1.8 | (0.9) | — | — | 0.4 | — | — | — | 1.3 |
Transfers from Level 3 during the year ended 31 December 2012 were due to receipt of control over construction company. The carrying amount of the total assets transferred was 3.5 billion RUB.
For the year ended 31 December 2012 the losses in the amount of 1.8 billion RUB reported in income statement on Level 3 financial assets were unrealized.
Total gains recognized as profit or loss on trading securities which are presented in the table above are reported in income statement within net gains arising from trading securities.
Total gains recognized as profit or loss on securities designated at fair value through profit or loss which are presented in the table above are reported in income statement within net losses arising from securities designated at fair value through profit or loss.
Total gains recognized as profit or loss on derivative financial instruments which are presented in the table above are reported in income statement within net gains from operations with other derivatives.
Valuation of available for sale shares in a stock exchange of 13.7 billion RUB using valuation techniques based on non-observable inputs
The Group determined the fair value of the investments based on discounted cash flow model with the following principal assumptions underlying the estimation of the fair value: type of WACC and estimated future operating cash flows.
Should the WACC used by the Group in the valuation model increase/decrease by 1%, the carrying value of the financial instrument would be 1.2 billion RUB lower / 1.4 billion RUB higher.
Valuation of investments in shares of an associated company involved in innovation business at fair value through profit and loss of 4.4 billion RUB using a valuation technique based on non-observable inputs
The Group determined the fair value of the investments based on discounted cash flow model with the following principal assumptions underlying the estimation of the fair value: type of the weighted average cost of capital (hereinafter — “WACC”); volume of production, sale price of goods sold (in particular crystal polisilicon), cost of sales. When determining the sale price of goods sold the Group used current market prices and forecasts of analytical companies. As at 31 December 2012 the estimated value of the WACC used by the Group comprised 18.38%.
Should the WACC used by the Group in the valuation model increase/decrease by 1%, the carrying value of the financial instrument would be 0.3 billion RUB lower / 0.3 billion RUB higher.
Valuation of available for sale shares in a real estate company of 3.1 billion RUB using valuation techniques based on non-observable inputs
The Group determined fair value of investments based on discounted cash flow model using the following key assumptions: type of WACC and estimated capitalization rate which depend on forecasts on property prices.
Should the discount rate used by the Group in the valuation model increase/decrease by 1%, the carrying value of the financial instrument would be 0.1 billion RUB lower / 0.1 billion RUB higher. Should the capitalization rate used by the Group in the valuation model increase/decrease by 1%, the carrying value of the financial instrument would be 0.3 billion RUB lower / 0.3 billion RUB higher.
Valuation of available for sale non-voting shares in a special investment fund (SIF) of 1.6 billion RUB using valuation techniques based on non-observable inputs
The Group determined fair value of investments based on discounted cash flow model using the following key assumptions: type of WACC and estimated guaranteed fixed yield on exit. Guaranteed fixed yield has not linked to the market and so has immaterial influence on the value of the financial instrument.
Should the discount rate used by the Group in the valuation model increase/decrease by 1%, the carrying value of the financial instrument would be 0.03 billion RUB lower / 0.03 billion RUB higher.
Valuation of foreign currency derivatives contracts of 19.8 RUB billion using non-observable inputs
The inputs used for estimation of fair values of foreign currency derivatives were the yield to maturity of the Belarusian Eurobonds in USD (7.44%). The obligations in Belarusian roubles were estimated against the prevailing rate of attracting funds in Belarusian roubles at the reporting date (37.0%). Should the input rate for Belarusian roubles decrease for 1000 base points the carrying value of the foreign currency derivatives would be 3.1% lower.
The following table shows a reconciliation of the opening and closing amount of Level 3 financial assets and liabilities which are recorded at fair value as at 31 December 2011:
| In billions of Russian Roubles | At 1 January 2011 | Total gains reported in income statement | Purchases | Business combinations | Sales | At 31 December 2011 |
|---|---|---|---|---|---|---|
| Financial assets | ||||||
| Trading securities | — | — | — | 2.7 | — | 2.7 |
| Securities designated at fair value through profit or loss | 3.4 | 0.3 | 0.5 | 1.2 | — | 5.4 |
| Investment securities available for sale | 11.9 | (0.2) | 8.5 | — | (5.9) | 14.3 |
| Derivative financial instruments | 5.0 | 20.6 | — | — | (2.0) | 23.6 |
| Total level 3 financial assets | 20.3 | 20.7 | 9.0 | 3.9 | (7.9) | 46.0 |
| Financial liabilities | ||||||
| Securties sold, not yet purchased | — | — | — | 0.3 | — | 0.3 |
| Derivative financial instruments | — | — | 0.6 | — | — | 0.6 |
| Structured notes | — | — | — | 0.9 | — | 0.9 |
| Total level 3 financial liabilities | — | — | 0.6 | 1.2 | — | 1.8 |
For the year ended 31 December 2011 the gains in the amount of 21.4 billion RUB reported in income statement on Level 3 financial assets were unrealized. All the gains reported in other comprehensive income on Level 3 financial assets were unrealized.
Total gains recognized as profit or loss on securities designated at fair value through profit or loss which are presented in the table above are reported in income statement within net (losses)/gains arising from securities designated at fair value through profit or loss.
Total gains recognized as profit or loss on investment securities available for sale which are presented in the table above are reported in income statement within net gains arising from investment securities available for sale.
Total gains recognized as profit or loss on derivative financial instruments which are presented in the table above are reported in income statement within net gains arising from operations with other derivatives.
Investments in shares of a company involved in construction business at fair value through profit and loss of 3.6 billion RUB using a valuation technique based on non-observable inputs
The Group determined the fair value of the investments based on discounted cash flow model with the following principal assumptions underlying the estimation of the fair value: type of the weighted average cost of capital (hereinafter — “WACC”); volume of construction of housing premises and hotels, terms of construction and subsequent sale, sale price per square meter of housing premises and respective cost of sale, booking rates for hotel rooms.
When determining the sale prices per square meter of housing premises and booking rates for hotel rooms the Group used comparable analogues and estimation of the annual increase in prices. As at 31 December 2011 the estimated value of the WACC used by the Group comprised 17.02%.
Should the WACC used by the Group in the valuation model increase/decrease by 1%, the carrying value of the financial instrument would be 0.3 billion RUB lower / 0.3 billion RUB higher.
Valuation of available for sale shares in a stock exchange of 13.2 billion RUB using valuation techniques based on non-observable inputs
The Group determined the fair value of the investments based on discounted cash flow model with the following principal assumptions underlying the estimation of the fair value: type of WACC and estimated future operating cash flows.
Should the WACC used by the Group in the valuation model increase/decrease by 1%, the carrying value of the financial instrument would be 1.1 billion RUB lower / 0.9 billion RUB higher.
Valuation of forward foreign currency contracts and forward precious metals contracts of 20.1 billion RUB using non-observable inputs
Fair values for forward foreign currency contracts and forward precious metals contracts are obtained from the interest rates parity model, using rates prevailing on the market of the Republic of Belarus and international markets with comparable business conditions.
The inputs used for estimation of fair values of foreign currency derivatives were the quotes of sovereign credit default swaps of the countries with the same credit rating as the rating of the Republic of Belarus (10.2%).
Claims in precious metals were estimated against the rate of attracting cashless precious metals in term deposits (6%).
The obligations in Belorusian Roubles were estimated against the prevailing rate of attracting funds in Belorusian Roubles at the reporting date (57.9%).
Should the input rate for Belorusian Roubles decrease/increase for 10 p.p. the carrying value of the foreign currency derivatives would be 2.7% lower / 2.2% higher.
Valuation of a put option on unquoted retail trading company shares of 1.2 billion RUB using non-observable inputs
The fair value of the option was determined using the Black-Scholes option pricing model. The inputs of the model include current market price of underlying shares and its historical volatility, option strike price and market risk-free rate of return, the principal input being the price of the shares.
Fair value of the underlying shares as at 31 December 2011 was estimated using the discounted cash flow model and comprised 9.1 billion RUB. Should the estimated value of shares used by the Group in the valuation model increase/decrease by 1%, the carrying value of the financial instrument would be 0.02 billion RUB lower / 0.02 billion RUB higher.
Valuation of a put/call option on shares of 2.6 billion RUB using non-observable inputs
The fair value of the option was determined using the Black-Scholes option pricing model. The principal inputs of the model include share price volatility of publicly traded companies operating in the same industry, share price valuation made using the discounted cash flow model and market risk-free rate of return.
Fair values of financial assets are as follows:
| In billions of Russian Roubles | 2012 | 2011 | ||
|---|---|---|---|---|
| Carrying value | Fair value | Carrying value | Fair value | |
| Financial assets carried at amortised cost | ||||
| Cash and cash equivalents: | ||||
| 680.8 | 680.8 | 438.7 | 438.7 |
| 260.4 | 260.4 | 51.3 | 51.3 |
| 268.5 | 268.5 | 113.9 | 113.9 |
| 81.1 | 81.1 | 21.7 | 21.7 |
| 211.2 | 211.2 | 101.2 | 101.2 |
| Due from other banks | 114.8 | 114.8 | 35.1 | 35.1 |
|
Loans and advances to customers: | ||||
| 4,971.6 | 5,029.4 | 3,713.3 | 3,658.1 |
| 2,765.7 | 2,734.4 | 2,270.0 | 2,215.4 |
| 1,524.2 | 1,464.2 | 906.7 | 930.3 |
| 1,116.9 | 1,094.1 | 748.6 | 778.6 |
| 120.9 | 118.2 | 81.1 | 82.3 |
|
Securities pledged under repurchase agreements: | ||||
| 267.5 | 266.8 | 137.2 | 136.1 |
| Investment securities held to maturity | 105.9 | 105.5 | 286.5 | 278.9 |
|
Other financial assets: | ||||
| 107.5 | 107.5 | 78.8 | 78.8 |
| 16.7 | 16.7 | 6.5 | 6.5 |
| 10.1 | 10.1 | 15.2 | 15.2 |
| 5.6 | 5.6 | 0.1 | 0.1 |
| 4.5 | 4.5 | 3.9 | 3.9 |
| 4.4 | 4.4 | 2.7 | 2.7 |
| 4.4 | 4.4 | 4.8 | 4.8 |
| Total financial assets carried at amortised cost | 12,642.7 | 12,582.6 | 9,017.3 | 8,953.6 |
Fair values of financial liabilities are as follows:
| In billions of Russian Roubles | 2012 | 2011 | ||
|---|---|---|---|---|
| Carrying value | Fair value | Carrying value | Fair value | |
| Financial liabilities carried at amortised cost | ||||
|
Due to other banks: | ||||
| 854,9 | 854,9 | 232,9 | 232,9 |
| 518,2 | 518,2 | 240,4 | 240,4 |
| 79,3 | 79,3 | 59,1 | 59,1 |
|
Due to Individuals: | ||||
| 1 401,1 | 1 401,1 | 1 077,0 | 1 077,0 |
| 5 582,1 | 5 541,7 | 4 649,3 | 4 667,9 |
|
Due to corporate customers: | ||||
| 99,0 | 99,0 | 142,2 | 142,2 |
| 270,1 | 273,9 | 39,6 | 39,5 |
| 1 130,1 | 1 130,1 | 1 230,2 | 1 230,2 |
| 1 696,9 | 1 722,1 | 793,9 | 837,0 |
|
Debt securities in issue: | ||||
| 291,6 | 315,0 | 169,6 | 168,1 |
| 227,2 | 231,6 | 9,8 | 9,8 |
| 110,1 | 109,7 | 77,2 | 70,8 |
| 44,3 | 44,5 | 9,9 | 10,0 |
| 16,1 | 16,1 | — | — |
| 0,1 | 0,1 | 0,7 | 0,7 |
|
Other borrowed funds: | ||||
| 306,3 | 304,7 | 141,9 | 141,9 |
| 162,9 | 162,7 | 102,1 | 102,1 |
|
Other financial liabilities: | ||||
| 63,7 | 63,7 | 45,8 | 45,8 |
| 36,5 | 36,5 | 10,1 | 10,1 |
| 11,7 | 11,7 | 13,1 | 13,1 |
| 6,2 | 6,2 | 5,2 | 5,2 |
| 4,1 | 4,1 | 10,5 | 10,5 |
| 1,3 | 1,3 | 1,4 | 1,4 |
| Other | 13,2 | 13,2 | 6,5 | 6,5 |
|
Subordinated debt: | ||||
| 303,3 | 303,3 | 303,3 | 303,3 |
| 61,1 | 62,3 | — | — |
| 20,3 | 19,0 | 0,2 | 0,2 |
| Total financial liabilities carried at amortised cost | 13 311,7 | 13 326,0 | 9 371,9 | 9 425,7 |
Financial instruments carried at fair value. Trading securities, other assets at fair value through profit or loss, financial derivatives, available for sale financial assets are carried in the consolidated statement of financial position at fair value.
Cash and cash equivalents are carried at amortised cost which approximately equals their current fair value.
Refer to Note 3 for accounting policy on financial instruments carried at fair value.
Loans and receivables carried at amortised cost. The fair value of floating rate instruments is normally their carrying amount. Due to significant changes in market situation interest rates for loans and advances to customers and due from other banks issued at fixed interest rates can be revised. Therefore interest rates for loans issued just before reporting date do not differ significantly from interest rates for new credit instruments with similar credit risk and remaining maturity. If under the Group assessment interest rates for the loans issued before reporting date differ significantly from current interest rates for similar credit instruments the fair value for these loans is estimated. The estimation is based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. Discount rates used depend on currency, maturity of the instrument and credit risk of the counterparty.
Contractual interest rates on loans and advances to customers and due from banks as at 31 December 2012 and 31 December 2011 were as follows:
| 2012 | 2011 | |
|---|---|---|
| Due from banks | 0.01% to 11.0% p.a. | 1.5% to 8.5% p.a. |
| Loans and advances to customers: | ||
| Corporate loans | 5.2% to 18.7% p.a. | 5.3% to 17.1% p.a. |
| Loans to individuals | 7.4% to 24.0% p.a. | 8.0% to 21.0% p.a. |
Estimated fair value of other financial assets including trade debtors equals their carrying amount considering short-term nature of these assets.
Liabilities carried at amortised cost
The fair value is based on quoted market prices, if available. The estimated fair value of fixed interest rate instruments with stated maturity, for which a quoted market price is not available, was estimated based on expected cash flows discounted at current interest rates for new instruments with similar credit risk and remaining maturity. The fair value of liabilities repayable on demand or after a notice period (“demandable liabilities”) is estimated as the amount payable on demand, discounted from the first date that the amount could be required to be paid. Discount rates used were consistent with the Group’s credit risk and also depend on currency and maturity of the instrument and ranged from 0.0% p.a. to 13.3% p.a. (2011: from 0.1% p.a. to 17.0% p.a.).
Derivative financial instruments
All derivative financial instruments are carried at fair value as assets when the fair value is positive and as liabilities when the fair value is negative. Refer to Note 34.