Rules on the Preparation, Submission and Supervision of Consolidated Prudential Reports (with amendments dated 15 April 2010)

“Dövlət qeydiyyatına alınmışdır” Azərbaycan Respublikası Ədliyyə Nazirliyi Qeydiyyat N 3190 “23” sentyabr 2005 -ci il Nazir __________ Fikrət Məmmədov “Təsdiq edilmişdir” Azərbaycan Respublikası Mərkəzi Bankı İdarə Heyətinin “01” sentyabr 2005-ci il tarixli qərarı ilə Protokol N 25 İdarə Heyətinin sədri _____________ Elman Rüstəmov

KONSOLIDASIYA ƏSASINDA PRUDENSİAL HESABATLARIN TƏRTİBİ, TƏQDİM EDİLMƏSİ VƏ NƏZARƏT QAYDALARI (15 aprel 2010-cu il tarixli dəyişikliklərlə) BAKU – 2005

1. General Provisions 1.1. These Rules are prepared based on the Laws of the Republic of Azerbaijan "On the Central Bank of the Republic of Azerbaijan" and "On Banks", as well as other normative legal acts, and define the procedures for the preparation and submission of consolidated prudential reports by banks, including local branches of foreign banks (hereinafter – banks), as well as holding companies, in accordance with International Financial Reporting Standards (hereinafter – IFRS), and the procedures for supervising them based on these reports. 1.2. The main purpose of supervision is to assist the Central Bank in ensuring the safety and soundness of the banking system by determining the impact on the current and future financial position of banks, as well as their reliable and prudent management, of significant shareholders not directly supervised by the Central Bank of the Republic of Azerbaijan (hereinafter – the Central Bank) and other persons associated with the banks.

2. Definitions For the purposes of these Rules, the following terms are used: 2.1. Subsidiary – an organization that, due to its predominant participation in the charter capital or in accordance with a contract concluded between participants, has the right to determine the decisions made by another organization (parent organization). 2.2. Parent organization (parent bank) – an organization that, due to its predominant participation in the charter capital of a subsidiary or in accordance with a contract concluded between the subsidiary and other participants, has the right to determine the decisions made by the subsidiary. 2.3. Holding company – a group created by one or more natural and/or legal persons for the purpose of owning shares in and managing one or several subsidiaries, including commercial banks. For the purposes of these Rules, holding companies are divided into: 2.3.1. Bank holding company – a group with one or several subsidiary banks possessing a banking license, regulated and supervised by the banking regulation authorities of the country where its head office is located. 2.3.2. Financial holding company – a group consisting of banks and other subsidiaries operating only in the financial sector. 2.3.3. Non-financial holding company – a group with one or more subsidiaries operating in various sectors of the economy, including banks. 2.4. Consolidated financial statements – comprehensive financial statements prepared by the parent organization and all its subsidiaries in accordance with IFRS.

3. Preparation of Consolidated Reports 3.1. Consolidated prudential reports prepared on a consolidated basis are submitted to the Central Bank for the purpose of assessing the bank's financial position. Financial statements attached to prudential reports are prepared in accordance with IFRS and the Central Bank's "Rules on the Preparation and Submission of Comprehensive Financial Statements of Credit Institutions of the Republic of Azerbaijan and Accounting for Investments in Subsidiary Enterprises". Financial statements are submitted in forms determined by the Central Bank, coordinated with the Ministry of Finance of the Republic of Azerbaijan. 3.2. Each parent bank having a subsidiary operating in the Republic of Azerbaijan, as well as banks that are subsidiaries of holding companies, ensure the preparation of consolidated prudential reports. 3.3. To determine the specific impact on the bank supervised by the Central Bank of all subsidiaries of holding companies and parent banks, as well as other persons associated with the bank, a scheme (diagram) reflecting the structure of the group and its participation share in each subsidiary (of both group members and other persons), as well as the participation share of each subsidiary included in the group in other legal entities, must be submitted by the bank to the Central Bank by the end of the month following the completion of the calendar year. The following are submitted together with the scheme: 3.3.1. information on shareholders owning (holding) shares (capital) of the holding company directly or indirectly; 3.3.2. names, patronymics, and surnames of management bodies having the right to make decisions related to the holding company's policy, and their heads; 3.3.3. types of activities of the bank's subsidiaries and other subsidiaries of the holding company to which it belongs; 3.3.4. the latest external audit report of the holding company, its subsidiaries, and other persons associated with the bank; 3.3.5. name and address of the relevant executive authority (if any) exercising supervision over the holding company or any of its subsidiaries; 3.4. Consolidated prudential reports must be prepared as of January 01 and July 01 each year. 3.5. Financial statements attached to consolidated prudential reports prepared based on the results of the financial year must be checked by external auditors in accordance with International Audit Standards. 3.6. The following financial statements are attached to consolidated prudential reports submitted to the Central Bank: 3.6.1. group balance sheet; 3.6.2. group statement of profit or loss; 3.6.3. group statement of cash flows; 3.6.4. group statement of changes in equity; 3.6.5. explanatory notes (including information on cash flows within the group). 3.7. Information on persons with direct and indirect participation in each subsidiary of the holding company, including the volume of their participation (in percentage and amount), as well as information on the heads of executive bodies of the holding company's subsidiaries, is included in consolidated prudential reports prepared on a consolidated basis. 3.8. When consolidated prudential reports are submitted to the Central Bank, the following are attached depending on the structure of the holding company: 3.8.1. Regarding subsidiary banks included in the holding company: 3.8.1.1. information on charter capital; 3.8.1.2. information on total capital; 3.8.1.3. information on the adequacy of total capital; 3.8.1.4. information on transactions with persons associated with the bank; 3.8.1.5. information on major risks. 3.8.2. Regarding those subsidiaries when insurance-operating subsidiary organizations are included in the financial holding company or bank: 3.8.2.1. information indicated in sub-items 3.8.1.1.-3.8.1.5 of these Rules; 3.8.2.2. information on the fulfillment of requirements of the Ministry of Finance of the Republic of Azerbaijan by subsidiary organization(s) conducting insurance activities. 3.8.3. Regarding existing subsidiary organizations when a subsidiary organization conducting insurance activities is not included in the non-financial holding company: 3.8.3.1. information indicated in sub-items 3.8.1.1.-3.8.1.5 of these Rules; 3.8.3.2. information on the calculation of net assets (the difference between balance sheet assets and balance sheet liabilities) for subsidiary organization(s) not related to the financial sector. 3.8.4. Information on the items indicated in sub-items 3.8.1., 3.8.2. and 3.8.3. of these Rules when subsidiary organizations conducting insurance activities are included in the non-financial holding company. 3.9. Depending on the types of activities of subsidiaries of holding companies, parent organizations of banks, and their subsidiaries, the Central Bank may request from the bank other necessary information regarding the management and current activities of these entities to perform its supervisory functions and verify the accuracy of financial information. 3.10. If a legal entity conducting activities not contrary to the Law "On Banks" of the Republic of Azerbaijan for the purpose of fulfilling obligations is converted into a subsidiary of the bank, in this case, the activities of such legal entity are reflected in the consolidated prudential reports prepared by the parent bank in accordance with IFRS No. 27. 3.11. The financial statements of a subsidiary are not included in consolidated prudential reports prepared on a consolidated basis in the following cases: 3.11.1. when the bank, for the purpose of fulfilling obligations, participates directly or indirectly as a shareholder in wholesale or retail trade, production, transport, agriculture, mining, or construction enterprises based on the Central Bank's permission; 3.11.2. when control over a legal entity is obtained by taking the debtor's (third party's) property, not used in banking activities, onto the bank's balance sheet for debt repayment purposes (this asset is shown on the balance sheet as an asset taken against a liability); 3.11.3. when the assets of a subsidiary are less than 1% of the holding company's assets; 3.11.4. when the bank's assets exceed 95% of the holding company's assets, excluding subsidiaries of commercial banks.

4. Submission of Consolidated Reports 4.1. Consolidated prudential reports prepared on a consolidated basis are submitted to the Central Bank by the subsidiary bank of the holding company, as well as by the parent bank having a subsidiary. 4.2. When a holding company has several subsidiary banks, one main bank must be selected from among the holding company's subsidiary banks for the purpose of submitting consolidated prudential reports to the Central Bank. 4.3. Consolidated prudential reports prepared on a consolidated basis are submitted to the Central Bank by the parent bank or a bank selected in accordance with item 4.2 of these Rules, together with reports and information listed in Section 3 of these Rules for each subsidiary organization of the holding company, the parent organization of the bank, and its subsidiaries. 4.4. Consolidated prudential reports prepared as of July 01 must be submitted to the Central Bank within a maximum period of 3 months after the reporting period ends. 4.5. Annual consolidated prudential reports prepared on a consolidated basis must be submitted to the Central Bank within a maximum period of 5 months after the financial year ends. These reports must also include financial statements and auditor's opinions verified by external auditors in accordance with International Audit Standards for the parent organization and each subsidiary. Foreign holding companies with subsidiaries in Azerbaijan must submit their annual prudential reports, including financial statements and auditor's opinions verified by external auditors in accordance with International Audit Standards, to the Central Bank within a maximum period of 8 months