PROSPECTUS DATED 3 MAY 2006

SC PAREX BANKA
(incorporated with limited liability under the laws of the Republic of Latvia)
EUR 200,000,000 5.625 per cent.
Notes due 5 May 2011
The issue price of the EUR 200,000,000 5.625 per cent. Notes due 5 May 2011 (the ‘‘Notes’’) of SC Parex banka (the
‘‘Bank’’ or the ‘‘Issuer’’) is 99.69 per cent. of their principal amount.
Unless previously redeemed or cancelled, the Notes will be redeemed at their principal amount on 5 May 2011. The
Notes are subject to redemption in whole, at their principal amount together with accrued interest, at the option of the
Issuer at any time in the event of certain changes affecting taxation in Latvia. See ‘‘Terms and Conditions of the Notes –
Redemption and Purchase’’.
The Notes will bear interest from and including 5 May 2006 at the rate of 5.625 per cent. per annum payable annually in
arrear on 5 May each year commencing on 5 May 2007. Payments on the Notes will be made in Euro without deduction
for or on account of taxes imposed or levied by the Republic of Latvia to the extent described under ‘‘Terms and
Conditions of the Notes – Taxation’’.
This document (the ‘‘Prospectus’’) comprises a prospectus for the purposes of Article 5 of Directive 2003/71/EC (the
‘‘Prospectus Directive’’). This Prospectus has been prepared for the purposes of Article 5(3) of the Prospectus
Directive and in accordance with the Prospectus Rules of the Financial Services Authority made under section 73A of
the Financial Services and Markets Act 2000 and has been approved as a Prospectus by the Financial Services
Authority, which is the competent authority for the purposes of the Prospectus Directive and relevant implementing
measures in the United Kingdom. A copy of this document has been filed with the Financial Services Authority in
accordance with Rule 3.2 of the Prospectus Rules.
Application has been made for the Notes to be admitted to listing on the Official List of the Financial Services
Authority (in its capacity as competent authority for the purposes of Part VI of the Financial Services and Markets Act
2000, the ‘‘UK Listing Authority’’) and to trading on the gilt-edged and fixed interest market of the London Stock
Exchange plc (the ‘‘London Stock Exchange’’) which is a regulated market for the purposes of Directive 93/22/EC
(the ‘‘Investment Services Directive’’). Such listing is expected to take effect on or about 5 May 2006.
For a discussion of certain risk factors regarding the Issuer and the Notes which should be considered by
prospective purchasers, see ‘‘RISK FACTORS’’ on page 6.
The Notes have not been, and will not be, registered under the United States Securities Act of 1933 (the ‘‘Securities
Act’’) and are subject to United States tax law requirements. The Notes are being offered outside the United States by
the Joint-Lead Managers (as defined in ‘‘Subscription and Sale’’) in accordance with Regulation S under the Securities
Act (‘‘Regulation S’’), and may not be offered, sold or delivered within the United States or to, or for the account or
benefit of, U.S. persons except pursuant to an exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act.
The Notes will be in the form of a global note certificate (the ‘‘Global Note Certificate’’), which will be registered in
the name of Chase Nominees Limited as nominee for, and deposited with, a common depositary for Euroclear Bank
S.A/N.V. (‘‘Euroclear’’) and Clearstream Banking, socie´te´ anonyme, Luxembourg (‘‘Clearstream, Luxembourg’’) on
or around 5 May 2006 (the ‘‘Closing Date’’). Individual note certificates (‘‘Individual Note Certificates’’) will only be
available in the limited circumstances described under ‘‘Summary of Provisions Relating to the Notes in Global Form’’.
The Notes are in the denomination of EUR 50,000 each and integral multiples of EUR 1,000 in excess thereof. For so
long as the Notes are represented by a Global Note Certificate and the relevant clearing system(s) so permit, the Notes
shall be tradable in such denominations, subject always to the minimum denomination and trading amount of EUR
50,000. There is no assurance, however, that the relevant clearing system(s) will enforce the minimum trading amount.
Joint-Lead Managers
DEUTSCHE BANK HSBC
Co-Managers
SC PAREX BANKA RZB Austria Raiffeisen Zentralbank O
¨
sterreich AG
The date of this Prospectus is 3 May 2006
IMPORTANT NOTICES
The Issuer accepts responsibility for the information contained in this Prospectus. To the best of the knowledge of
the Issuer (which has taken all reasonable care to ensure that such is the case) the information contained in this
Prospectus is in accordance with the facts and does not omit anything likely to affect the import of such
information.
Information which has been sourced from third parties has been accurately reproduced and, as far as the Issuer
is aware and is able to ascertain from information published by such third parties, no facts have been omitted
which would render the reproduced information inaccurate or misleading. Where such information is reproduced
in this Prospectus, the source of that information is stated.
Neither the Joint-Lead Managers nor any of their respective directors, affiliates, advisers or agents have made an
independent verification of the information contained herein. Accordingly, no representation, warranty or
undertaking, express or implied, is made and no responsibility or liability is accepted by the Joint-Lead
Managers nor any of their respective directors, affiliates, advisers or agents as to the accuracy or completeness
of the information contained in this Prospectus or any other information provided by the Issuer in connection
with the Notes or their distribution. The statements made in this paragraph are made without prejudice to the
responsibility of the Issuer for the information contained in this Prospectus.
The Issuer has not authorised the making or provision of any representation or information regarding the Issuer
or the Notes other than as contained in this Prospectus or as approved for such purpose by the Issuer. Any such
representation or information should not be relied upon as having been authorised by the Issuer or the Joint-
Lead Managers.
Neither the delivery of this Prospectus nor the offering, sale or delivery of any Note shall in any circumstances
create any implication that there has been no adverse change, or any event reasonably likely to involve any
adverse change, in the condition (financial or otherwise) of the Issuer since the date of this Prospectus.
This Prospectus does not constitute an offer of, or an invitation to subscribe for or purchase, any Notes. The
distribution of this Prospectus and the offering, sale and delivery of Notes in certain jurisdictions may be
restricted by law. Persons into whose possession this Prospectus comes are required by the Issuer and the Joint-
Lead Managers to inform themselves about and to observe any such restrictions. For a description of certain
restrictions on offers, sales and deliveries of Notes and on distribution of this Prospectus and other offering
material relating to the Notes, see ‘‘Subscription and Sale’’.
In particular, the Notes have not been and will not be registered under the Securities Act and are subject to
United States tax law requirements. Subject to certain exceptions, Notes may not be offered, sold or delivered
within the United States or to U.S. persons.
In this Prospectus, unless otherwise specified, references to ‘‘US’’, ‘‘U.S. $’’, ‘‘U.S. dollars’’ or ‘‘dollars’’ are to
United States dollars, references to ‘‘E’’, ‘‘EUR’’ or ‘‘Euro’’ are to the single currency introduced at the start of
the third stage of the European Economic and Monetary Union pursuant to the Treaty establishing the European
Community, as amended, and references to ‘‘LVL’’, ‘‘Lat’’ or ‘‘Ls’’ are to the lawful currency for the time being
of the Republic of Latvia (‘‘Latvia’’) and references to ‘‘LTL’’ are to the lawful currency for the time being of the
Republic of Lithuania (‘‘Lithuania’’).
IN CONNECTION WITH THE ISSUE OF NOTES, THE STABILISING MANAGER(S) (OR PERSONS
ACTING ON BEHALF OF ANY STABILISING MANAGER(S)) MAY OVER-ALLOT NOTES
(PROVIDED THAT, IN THE CASE OF NOTES TO BE ADMITTED TO TRADING ON THE
LONDON STOCK EXCHANGE, THE AGGREGATE PRINCIPAL AMOUNT OF NOTES ALLOTTED
DOES NOT EXCEED 105 PER CENT. OF THE AGGREGATE PRINCIPAL AMOUNT OF THE
RELEVANT ISSUE) OR EFFECT TRANSACTIONS WITH A VIEW TO SUPPORTING THE
MARKET PRICE OF THE NOTES AT A LEVEL HIGHER THAN THAT WHICH MIGHT
OTHERWISE PREVAIL. HOWEVER, THERE IS NO ASSURANCE THAT THE STABILISING
MANAGER(S) (OR PERSONS ACTING ON BEHALF OF A STABILISING MANAGER) WILL
UNDERTAKE STABILISATION ACTION. ANY STABILISATION ACTION MAY BEGIN ON OR
AFTER THE DATE ON WHICH ADEQUATE PUBLIC DISCLOSURE OF THE TERMS OF THE
OFFER OF THE RELEVANT NOTES IS MADE AND, IF BEGUN, MAY BE ENDED AT ANY TIME,
BUT IT MUST END NO LATER THAN THE EARLIER OF 30 DAYS AFTER THE ISSUE DATE OF
THE RELEVANT NOTES AND 60 DAYS AFTER THE DATE OF THE ALLOTMENT OF THE
RELEVANT NOTES.
2
CONTENTS
Key Features of the Offering 4
Risk Factors 6
Enforcement of Foreign Judgments 10
Selected Financial Information 11
Terms and Conditions of the Notes 14
Summary of Provisions Relating to the Notes in Global Form 27
Exchange Rate Information 28
Use of Proceeds 29
Financial Review 30
Capitalisation of the Group 41
Description of the Group 42
Lending and Selected Statistical Information 57
Recent Developments and the Banking Sector in Latvia 68
Taxation 71
Subscription and Sale 72
General Information 75
Financial Statements and Auditor’s Reports F-1
3
KEY FEATURES OF THE OFFERING
Issuer: SC PAREX BANKA.
Issue: EUR 200,000,000 5.625 per cent. Notes due 5 May 2011.
Issue Price: 99.69 per cent. of the principal amount of the Notes.
Fiscal Agent: JPMorgan Chase Bank, N.A.
Interest: The Notes will bear interest from, and including, 5 May 2006 to, but
excluding, 5 May 2011 at a rate of 5.625 per cent. per annum, payable in
arrear on 5 May in each year, commencing on 5 May 2007.
Status: The Notes constitute direct, general and unconditional obligations of the
Issuer which will at all times rank pari passu among themselves and at
least pari passu with all other present and future unsecured obligations of
the Issuer, save for such obligations as may be preferred by law.
Form: The Notes will be issued in registered form and will initially be in the form
of the Global Note Certificate. Individual Note Certificates will be
available only in limited circumstances. See ‘‘Summary of Provisions
relating to the Notes in Global Form’’.
The Notes are in the denominations of EUR 50,000 and integral multiples
of EUR 1,000 in excess thereof. For so long as the Notes are represented
by a Global Note Certificate and the relevant clearing system(s) so permit,
the Notes shall be tradable in such denominations, subject always to the
minimum denomination and trading amount of EUR 50,000.
Negative Pledge: So long as any Note remains outstanding, neither the Issuer nor any of its
Principal Subsidiaries will create, or permit to subsist any Security Interest
(other than a Permitted Security Interest) (as defined in the ‘‘Terms and
Conditions of the Notes’’) upon its undertaking, assets or revenues
(including uncalled capital) to secure any Indebtedness or any Guarantee
of Indebtedness (the Existing Negative Pledge), or following certain
events, Relevant Indebtedness or any Guarantee of Relevant Indebtedness
(the Alternative Negative Pledge). See Condition 3 (Negative Pledge).
Tax Redemption: Subject to certain limitations, the Notes may be redeemed at the option of
the Issuer in whole at their principal amount, together with interest
accrued to the date fixed for redemption, in the event of certain changes in
taxation in the Republic of Latvia. See Condition 5(b) (Redemption for tax
reasons).
Taxation: All payments of principal and interest in respect of the Notes shall be
made free and clear of withholding taxes of the Republic of Latvia, unless
the withholding is required by law. In that event, the Issuer will (subject as
provided in Condition 7 (Taxation)) pay such additional amounts as will
result in the Noteholders receiving such amounts as they would have
received in respect of such Note had no such withholding been required.
See Condition 7 (Taxation).
Events of Default: If an Event of Default occurs, then any Note may, by written notice
addressed by the holder thereof to the Issuer and delivered to the Issuer or
to the Specified Office of the Fiscal Agent, be declared immediately due
and payable, whereupon it shall become immediately due and payable at
its principal amount together with accrued interest. See Condition 8
(Events of Default).
4
Use of Proceeds: The net proceeds of the issue of the Notes will be used by the Issuer for
general corporate purposes and the financing of new loans to customers.
See ‘‘Use of Proceeds’’.
Listing: Applications have been made for the Notes to be admitted to listing on the
Official List of the UKLA and to trading on the gilt-edged and fixed
interest market of the London Stock Exchange.
Selling Restrictions: The Notes have not been and will not be registered under the Securities
Act and, subject to certain exceptions, may not be offered or sold within
the United States. The Notes may be sold in other jurisdictions (including
the United Kingdom and the Republic of Latvia) only in compliance with
applicable laws and regulations. See ‘‘Subscription and Sale’’.
Governing Law: The Notes will be governed by English law.
Credit Rating: Moody’s Investor Services, Inc.: Long-term deposit rating: Ba1
Fitch Ratings Ltd.: Long-term foreign currency rating: BB+
Risk Factors: An investment in the Notes involves risk. See ‘‘Risk Factors’’.
ISIN: XS0253533318.
Common Code: 025353331.
5
RISK FACTORS
Prior to making an investment decision, prospective purchasers of the Notes should consider carefully, in the
light of the circumstances and their investment objectives, all the information contained in this Prospectus.
Prospective purchasers should nevertheless consider, among other things, the investment considerations relating
to the Latvian banking sector and the Issuer not normally associated with investments in other countries and
other issuers, including those set out below.
General risks related to the banking business carried on by the Group
Exposure to Latvian Economic Risk
Since as at 31 December 2005 57.0% of the loans made by the Bank and its subsidiaries (together, the ‘‘Group’’)
were to Latvian corporate borrowers, a general Latvian economic downturn or instability in certain sectors of the
Latvian or regional economy could have an adverse effect on the Group’s financial condition and results of
operations.
Competition
Because approximately 90% of the Group’s income originates from its Latvian customers and approximately
90% of its assets are in Latvia, the competition that most significantly affects the Group is that which is faced by
the Bank in Latvia. The Bank is subject to competition in Latvia from both domestic and foreign banks. As at 31
December 2005, there were a total of 22 domestic banks in Latvia, one branch of a foreign bank and five
representative offices of foreign banks. Although there are still a relatively large number of banks in Latvia, there
is significant concentration as the three largest banks in terms of assets, AS Hansabanka, AS SEB Latvijas
Unibanka and the Bank, account for more than 50% of the total banking sector’s assets. The Bank faces its
strongest competition from the other two large banks. Foreign-owned institutions may, through their
shareholders, have significantly greater resources and access to cheaper funding than the Bank. These banks
may also be able to leverage the international experience of their shareholders and may therefore prove more
attractive to the larger domestic corporate customers and foreign companies operating in Latvia. To this extent,
the Bank may be at a competitive disadvantage, particularly in relation to corporate customers, and its results of
operations may be adversely affected by this competition.
Capital Adequacy
The Basle Committee on Banking Regulation and Supervisory Practises (the ‘‘Basle Committee’’) has set
international standards for capital adequacy for banks. The minimum capital adequacy ratio recommended by the
1988 Basle Committee guidelines is 8%. The Group’s capital adequacy ratio under the Basle Committee
guidelines was 11.7% and 12.2% as at 31 December 2005 and 2004, respectively, and the Bank’s capital
adequacy ratio under the same guidelines was 12.2% and 12.8% as at 31 December 2005 and 2004, respectively.
The Latvian Financial and Capital Market Commission (the ‘‘FCMC’’), as the banking regulator, requires
Latvian commercial banks to maintain a capital adequacy ratio based on financial statements prepared in
accordance with International Financial Reporting Standards (‘‘IFRS’’) at 8% of risk-weighted assets. The
Group’s capital adequacy ratio under the FCMC requirements was 11.1% and 11.9% as at 31 December 2005 and
2004, respectively. The Bank’s capital adequacy ratio under the FCMC requirements was 11.7% and 12.5% as at
31 December 2005 and 2004, respectively.
As such, as at 31 December 2005, the capital adequacy level maintained by the Group and the Bank significantly
exceeds the minimum requirements set out by the FCMC and the Basle Committee. However, if the level of the
Group’s portfolio of loans to customers continues to grow significantly and the Bank fails to generate sufficient
level of profits to ensure consistent growth in equity through retained earnings, the Bank may need to raise new
capital to maintain the capital adequacy ratios set by the FCMC.
Any failure by the Bank and the Group to maintain certain capital adequacy ratios could lead to the imposition of
sanctions by the FCMC, which could have an adverse effect on the Group’s results of operations and financial
condition.
Liquidity Risks
The Group, like other commercial banks in Latvia and elsewhere, is exposed to maturity mismatches between its
assets and liabilities, which could lead to lack of liquidity at certain times. At 31 December 2005, the Group had a
negative cumulative maturity gap for a one month period. Although the Group believes that its level of access to
domestic and international interbank markets and its liquidity risk management policy, which includes
6
maintaining liquidity reserves sufficient to meet the Group’s liquidity needs for a certain period, allow and will
continue to allow the Group to meet its short-term and long-term liquidity needs, any maturity mismatches
between the Group’s assets and liabilities (including by reason of the withdrawal of large deposits) may have an
adverse effect on its financial condition and results of operations. See ‘‘Financial Review – Risk Management –
Liquidity Risk’’.
Interest Rate Risks
The Group is exposed to risks resulting from mismatches between the interest rates on its interest bearing
liabilities and interest-earning assets. While the Group monitors its interest rate sensitivity by analysing the
composition of its assets and liabilities and off-balance sheet financial instruments, any significant and
unanticipated interest rate movements may have a material adverse effect on the business, financial condition,
results of operations and prospects of the Group. See ‘‘Financial Review – Risk Management – Interest Rate
Risk’’.
Foreign Currency Risk
The Group is exposed to the effects of fluctuations in foreign currency exchange rates on its financial position and
cash flows. Although the Group is subject to limits on its open currency positions pursuant to FCMC regulations
and the Group’s internal policies, future changes in currency exchange rates and the volatility of the LVL may
adversely affect the Group’s foreign currency positions. Although the Group uses a number of currency hedging
arrangements, no assurances can be given that such hedging arrangements will be available or sufficient for the
Group’s future operations reflecting the under-developed nature of the currency hedging market in Latvia when
compared with more mature markets.
Risks specific to the Bank
Dependence on Key Personnel
The Group’s success in growing its business will depend, in part, on its ability to continue to attract, retain and
motivate qualified and skilled personnel. The Group relies on its senior management for the implementation of its
strategy and operation of its day-to-day activities. As competition for skilled personnel, especially on the senior
management level, is intense, the Group seeks to further develop its remuneration levels and to take other
measures to attract and motivate skilled personnel. If the Group is unable to retain key members of its senior
management and cannot hire new qualified personnel in a timely manner, its business and results of operations
could be adversely affected. Competition in Latvia for personnel with relevant expertise is intense due to a
disproportionately low number of available qualified and/or experienced individuals compared to demand. The
Group’s failure to manage successfully its personnel needs could adversely affect the Group’s business and
results of operations.
Proprietary Trading
The Group engages in various trading activities on its own account. The amount of fixed income trading
securities held by the Group as at 31 December 2005 was LVL 24.2 million (6.6% of the combined trading and
available for sale fixed income portfolio of the Group). Proprietary trading involves risk. Although the Group
principally undertakes proprietary trading activities with a view to hedging its liquidity risk in relation to its loan
portfolio (see ‘‘Financial Review – Results of Operations for the years ended 31 December 2005 and 2004 – Net
Profit from Trading Activities’’), future proprietary trading results may be significantly affected by market
conditions and could result in losses, which could have an adverse affect on the Group’s financial condition and
results of operations.
International Operations
Certain existing investments of the Group are in markets which may be susceptible to adverse developments. Any
international expansion, particularly into markets that remain in the relatively early stages of development and
which are more susceptible to fiscal and economic crises, may expose the Group to additional risks.
Loan Portfolio Growth
The Group’s net loans and advances have increased rapidly in recent years, most recently growing by 27% in
2005 to LVL 879 million as at 31 December 2005. The significant increase in the loan portfolio size in recent
years has increased the Group’s credit exposure. In addition, the Group’s strategy of further diversifying its
customer base, including through increased lending to medium and small corporate clients and retail customers,
may also increase the credit risk exposure in the Group’s loan portfolio. Failure to manage growth and
7
development successfully and to maintain the quality of its assets could have an adverse effect on the Group’s
financial condition and results of operations.
Concentration of Lending Base
As at 31 December 2005, the Group’s 10 major borrowers accounted for 22% of the total loan portfolio,
compared to 23% as at 31 December 2004. Any default by one or more of these borrowers could have an adverse
effect on the Group’s financial condition and results of operations.
Ownership concentration/Change of control
The Bank’s principal beneficial shareholders are Mr. Valery Kargin and Mr. Viktor Krasovitsky (the ‘‘Principal
Shareholders’’). They each hold 42.89 per cent. of the Bank’s share capital, making their aggregate holding over
85 per cent. of the Bank’s share capital. By virtue of such shareholding, the Principal Shareholders have the
ability jointly to influence the Bank’s business significantly through their ability to control actions which require
shareholder approval. If circumstances were to arise where the interests of the Principal Shareholders conflict
with the interests of the Noteholders, Noteholders could be disadvantaged by any such conflict, as the Principal
Shareholders could take actions contrary to the Noteholders’ interests.
Non-Resident Deposits
The majority of the Group’s deposit customers are not resident in Latvia. As at 31 December 2005, the Group
held LVL 929.6 million of deposits from corporate and other customers which were reported and recorded as
non-resident in Latvia, or 70.5% of the total deposits, compared with LVL 388.3 million of deposits from Latvian
resident customers. In practice, a number of these deposits are made by the Group’s Latvian corporate customers
through non-resident branches or subsidiaries. In 2005, deposits from Latvian corporate and private clients grew
by 22%, whilst non-resident deposits grew by 18%. If a change in circumstances occurs, including changes
relating to law or economic policy of either Latvia or other relevant countries from where the deposits are made,
this may encourage such customers to withdraw their funds from the Group. If such withdrawals were to occur
within a relatively short period of time, it could cause liquidity difficulties for the Group together with the loss of
a significant source of funding, which could have a material adverse effect on the Group’s financial condition and
results of operations.
Transactions with Related Parties
As at 31 December 2005, loans and advances by the Group to related parties totalled LVL 25.2 million, or 2.8%
of the Group’s total gross loan portfolio. As at 31 December 2005 the Group held deposits amounting to LVL
43.6 million from related parties or 3.3% of total deposits held by the Group.
Risk Management Systems
Risk management systems describe the risks of measurement and monitoring of the Group’s exposure to
liquidity, interest rate, foreign exchange and other market risks and how the Group is tackling the problem, if any.
Management of these risks also requires substantial resources. Although the Group believes that it has policies
and procedures in place to measure, monitor and manage liquidity and market risks, maturity mismatches or any
significant volatility in interest rate movements, exchange rates or commodity market prices could have a
material adverse effect on the business, financial condition, results of operations, foreign currency positions and
prospects of the Group.
Risks related to the Notes
Credit rating
The Issuer’s long-term unsubordinated foreign currency debt has been assigned a rating of BB+ by Fitch Ratings
Ltd. Its long-term deposit rating from Moody’s Investor Services, Inc. is Ba1. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to suspension, reduction or withdrawal at any
time by the assigning rating agency. Any adverse change in an applicable credit rating could adversely affect the
trading price for the Notes.
Absence of Trading Market for the Notes
Although application has been made to admit the Notes to the Official List of the UKLA and to trading on the
gilt-edged and fixed interest market of the London Stock Exchange, prior to the offering of the Notes, there has
been no existing market for the Notes. Accordingly, there can be no assurance as to the liquidity of any market
8
that may develop for the Notes, the ability of holders of the Notes to sell their Notes or the price at which such
holders would be able to sell Notes. There can be no assurance that an active trading market will develop or be
sustained. In addition, the liquidity of any market for the Notes will depend on the number of holders of the
Notes, the interest of securities dealers in making a market in the Notes and other factors. Accordingly, there can
be no assurance as to the development or liquidity of any market for the Notes.
EU savings directive
Under EC Council Directive 2003/48/EC on the taxation of savings income, Member States of the European
Union (‘‘Member States’’) are required, from 1 July, 2005, to provide to the tax authorities of another Member
State details of payments of interest (or similar income) paid by a person within its jurisdiction to an individual
resident in that other Member State. However, for a transitional period, Austria, Belgium and Luxembourg are
instead required (unless during that period they elect otherwise) to operate a withholding system in relation to
such payments (the ending of such transitional period being dependent upon the conclusion of certain other
agreements relating to information exchange with certain other countries). A number of non-EU countries and
territories including Switzerland have agreed to adopt similar measures (a withholding system in the case of
Switzerland) with effect from the same date.
If, following implementation of this Directive, a payment were to be made or collected through a Member State
which has opted for a withholding system and an amount of, or in respect of tax were to be withheld from that
payment, neither the Issuer nor any Paying Agent nor any other person would be obliged to pay additional
amounts with respect to any Note as a result of the imposition of such withholding tax. If a withholding tax is
imposed on payment made by a Paying Agent following implementation of this Directive, the Issuer will be
required to maintain a Paying Agent in a Member State that will not be obliged to withhold or deduct tax pursuant
to the Directive.
Taxation
The principal taxes payable by Latvian companies include corporate income tax, value-added tax, social security
contributions, excise duties, real estate tax, customs tax, natural resources tax and withholding taxes.
It is possible that tax laws or the interpretation of existing laws may change in such a way that the Bank’s
profitability and financial condition may be adversely affected.
9
ENFORCEMENT OF FOREIGN JUDGMENTS
The Issuer and substantially all of its assets are located in the Republic of Latvia. In addition, most of the
directors and officers of the Issuer are residents of the Republic of Latvia and substantially all of their personal
assets are located in the Republic of Latvia. As a result, it may be difficult for foreign investors of various
jurisdictions to effect service of process in the same manner as in their own jurisdiction on the Issuer or its
directors or officers in connection with any lawsuits against the Issuer or such persons related to the Notes.
Furthermore, foreign investors may have difficulties enforcing judgments of foreign courts against the Issuer or
its directors or officers in the Republic of Latvia.
The Republic of Latvia is a signatory to the New York Convention on the Recognition and Enforcement of
Foreign Arbitral Awards of 1958. Arbitration awards in countries that are signatories are enforceable in the
Republic of Latvia subject to this convention and certain other limitations (including applicable provisions of
Latvian law). The Notes provide for arbitration for the enforcement of any claims.
10
SELECTED FINANCIAL INFORMATION
The following tables contain summary financial information derived without material adjustment from the Bank’s
audited consolidated financial statements as at and for the years ended 31 December 2005 and 2004, which have
been audited by SIA Ernst & Young Baltic. These consolidated financial statements are presented in Lats and
have been prepared in accordance with International Financial Reporting Standards (‘‘IFRS’’).
Such financial statements and the accompanying notes, together with the auditors’ reports of SIA Ernst & Young
Baltic, appear on pages F-1 to F-88 of this Prospectus.
The selected financial information presented below should be read in conjunction with such financial statements,
reports and the notes thereto.
Consolidated Statements of Income for the years ended 31 December 2005 and 2004
2005 2004
LVL 000’s
Interest income 78,899 58,518
Interest expense (32,425) (19,848)
Net interest income 46,474 38,670
Commission and fee income 32,528 23,897
Commission and fee expense (6,794) (5,074)
Net commission and fee income 25,734 18,823
Profit on trading with financial instruments, net 15,484 13,227
Other operating income 2,135 1,920
Net operating income 89,827 72,640
Administrative expense (47,722) (38,800)
Depreciation and amortisation expense (6,347) (6,318)
Other operating expense (804) (344)
Impairment allowance (2,722) (9,109)
Release of previously established impairment allowance 5,347 1,010
Profit from investments in subsidiaries — (419)
Profit before corporate income tax and minority interest 37,579 18,660
Corporate income tax (4,365) (2,206)
Profit before minority interest 33,214 16,454
Minority interest — (2)
Net profit for the year 33,214 16,452
11
Consolidated Balance Sheets and Memorandum Items as at 31 December 2005 and 2004
2005 2004
LVL 000’s
Assets
Cash and deposits with central banks 144,079 70,781
Balances due from credit institutions 312,583 312,870
Loans and advances to customers 879,262 691,693
Fixed income securities 432,061 298,758
Shares and other non-fixed income securities 30,467 11,512
Derivative financial instruments 564 1,405
Intangible assets 2,805 3,497
Fixed assets 23,771 23,169
Prepayments and accrued income 10,340 8,334
Current income tax prepayment — 729
Other assets 6,404 1,733
Total assets 1,842,336 1,424,481
Liabilities
Balances due to credit institutions and central banks 262,996 172,250
Deposits from customers 1,317,924 1,105,571
Issued debt securities 74,070 —
Derivative financial instruments 2,366 3,310
Accrued expense and deferred income 7,695 4,354
Current income tax liability 772 —
Deferred income tax liability 608 905
Provision for liabilities and charges 109 56
Other liabilities 17,705 11,648
Total liabilities 1,684,245 1,298,094
Shareholders’ equity
Paid-in share capital 65,027 65,027
Share premium 12,694 12,694
Fair value revaluation reserve 2,358 3,867
Retained earnings 78,000 44,786
Total shareholders’ equity attributable to shareholders of the Bank 158,079 126,374
Minority interest 12 13
Total shareholders’ equity 158,091 126,387
Total liabilities and shareholders’ equity 1,842,336 1,424,481
Memorandum items
Contingent liabilities 21,115 25,900
Financial commitments 190,824 125,296
Foreign exchange contracts 703,087 805,001
Other financial instruments 105,013 25,592
Funds under trust management 166,053 170,514
12
Selected Consolidated Financial Ratios
As at 31 December
2005 2004
All figures in percentages
Non-interest income/ total income 38.9 40.0
Net operating income/ average total assets
(1)
5.5 5.8
Net interest margin 3.04 3.38
Operating expenses/ net operating income 61.1 62.6
Operating expenses/ average total assets
(1)
3.4 3.7
Return on average assets
(1)(2)
2.03 1.32
Return on average equity
(1)(3)
23.35 14.03
Loans/ total assets 47.7 48.6
Customer deposits/ total assets 71.5 77.6
Shareholders’ equity/ total assets 8.6 8.9
Interest earning assets/ total assets 93.5 93.9
Selected growth rates
Total interest earning assets 28.8 40.3
Net Loans 27.1 45.4
Total assets 29.3 33.8
Total deposits 19.2 32.3
(1) Averages are calculated based on opening and closing balances for the period.
(2) Net income as a percentage of average assets.
(3) Net income as a percentage of average shareholders’ equity
13
TERMS AND CONDITIONS OF THE NOTES
The following is the text of the Terms and Conditions of the Notes which (subject to completion and amendment)
will be endorsed on each Individual Note Certificate and will be attached and (subject to the provisions thereof)
apply to the Global Notes.
The EUR 200,000,000 5.625 per cent. Notes due 5 May 2011 (the ‘‘Notes’’, which expression includes any
further notes issued pursuant to Condition 13 (Further issues) and forming a single series therewith) of SC Parex
banka (the ‘‘Issuer’’) are the subject of a fiscal agency agreement dated 5 May 2006 (as amended or
supplemented from time to time, the ‘‘Agency Agreement’’) between the Issuer, JPMorgan Chase Bank, N.A. as
fiscal agent (the ‘‘Fiscal Agent’’, which expression includes any successor fiscal agent appointed from time to
time in connection with the Notes), J.P. Morgan Bank Luxembourg S.A. as registrar (the ‘‘Registrar’’, which
expression includes any successor registrar appointed from time to time in connection with the Notes), the
transfer agents named therein (together with the Registrar, the ‘‘Transfer Agents’’, which expression includes
any successor or additional transfer agents appointed from time to time in connection with the Notes) and the
paying agents named therein (together with the Fiscal Agent, the ‘‘Paying Agents’’, which expression includes
any successor or additional paying agents appointed from time to time in connection with the Notes). References
herein to the ‘‘Agents’’ are to the Registrar, the Fiscal Agent, the other Transfer Agents and the other Paying
Agents and any reference to an ‘‘Agent’’ is to any one of them.
Certain provisions of these terms and conditions (the ‘‘Conditions’’) are summaries of the Agency Agreement
and subject to its detailed provisions. Noteholders are entitled to the benefit of, are bound by, and are deemed to
have notice of, all the provisions of the Agency Agreement applicable to them.
Copies of the Agency Agreement are available for inspection by Noteholders during normal business hours at the
Specified Offices (as defined in the Agency Agreement) of each of the Paying Agents, the initial Specified Offices
of which are set out below.
1. FORM AND DENOMINATION; REGISTER, TITLE AND TRANSFERS
(a) Form and denomination: The Notes are in registered form and are issued in amounts of
EUR 50,000 and integral multiples of EUR 1,000 in excess thereof (each, an ‘‘Authorised
Holding’’).
(b) Register: The Issuer shall procure that the Registrar will maintain a register (the ‘‘Register’’) in
respect of the Notes in accordance with the provisions of the Agency Agreement. In these
Conditions the ‘‘holder’’ of a Note means the person in whose name such Note is for the time
being registered in the Register (or, in the case of a joint holding, the first named thereof) and
‘‘Noteholder’’ shall be construed accordingly. A certificate (each a ‘‘Note Certificate’’) will be
issued to each Noteholder in respect of its registered holding. Each Note Certificate will be serially
numbered with an identifying number which will be recorded in the Register.
(c) Title: The holder of each Note shall (except as otherwise required by law) be treated as the
absolute owner of such Note for all purposes (whether or not it is overdue and regardless of any
notice of ownership, trust or any other interest therein, any writing on the Note Certificate relating
thereto (other than the endorsed form of transfer) or any notice of any previous loss or theft of such
Note Certificate) and no person shall be liable for so treating such holder. No person shall have any
right to enforce any term or condition of the Notes under the Contracts (Rights of Third Parties)
Act 1999.
(d) Transfers: Subject as provided below in this paragraph (d) and in paragraphs (g) and (h) below, a
Note may be transferred upon surrender of the relevant Note Certificate, with the endorsed form of
transfer duly completed, at the Specified Office of the Registrar or any other Transfer Agent,
together with such evidence as the Registrar or the Transfer Agent may reasonably require to
prove the title of the transferor and the authority of the individuals who have executed the form of
transfer; provided, however, that a Note may not be transferred unless the principal amount of
Notes transferred and (where not all of the Notes held by a holder are being transferred) the
principal amount of the balance of Notes not transferred are Authorised Holdings. Where not all
the Notes represented by the surrendered Note Certificate are the subject of the transfer, a new
Note Certificate in respect of the balance of the Notes will be issued to the transferor.
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(e) Registration and delivery of Note Certificates: Within five business days of the surrender of a Note
Certificate in accordance with paragraph (d) above, the Registrar will register the transfer in
question and deliver a new Note Certificate of a like principal amount to the Notes transferred to
each relevant holder at its specified office or (at the request and risk of such relevant holder) by
uninsured first class mail (airmail if overseas) to the address specified for the purpose by such
relevant holder. In this paragraph, ‘‘business day’’ means a day on which commercial banks are
open for business (including dealings in foreign currencies) in the city where the Registrar and, if
different, the relevant Transfer Agent has its specified office.
(f) No charge: The transfer of a Note will be effected without charge by or on behalf of the Issuer, the
Registrar or the relevant Transfer Agent but against such indemnity as the Issuer, the Registrar or
(as the case may be) the Transfer Agent may require in respect of any tax or other duty of
whatsoever nature which may be levied or imposed in connection with such transfer.
(g) Closed Periods: Noteholders may not require transfers to be registered during the period of 15
days ending on the due date for any payment of principal or interest in respect of the Notes.
(h) Regulations concerning transfers and registration: All transfers of Notes and entries on the
Register are subject to the detailed regulations concerning the transfer of Notes scheduled to the
Agency Agreement. The regulations may be changed by the Issuer with the agreement of the
Registrar. A copy of the current regulations will be mailed (free of charge) by the Registrar to any
Noteholder who requests in writing a copy of such regulations.
2. STATUS
The Notes constitute direct, general and unconditional obligations of the Issuer which will at all times
rank pari passu among themselves and at least pari passu with all other present and future unsecured
obligations of the Issuer, save for such obligations as may be preferred by law.
3. NEGATIVE PLEDGE
(a) Applicable Negative Pledge: Prior to the redemption of the EUR 100,000,000 4.375 per cent.
Notes due 9 June 2008 (the ‘‘Existing Notes’’), the negative pledge applicable to the Notes shall
be the existing negative pledge (the ‘‘Existing Negative Pledge’’) set-out in Condition 3(b)
(Existing Negative Pledge). Following the redemption of the Existing Notes, the Existing Negative
Pledge will continue to apply to the Notes unless and until a Rating Adjustment Event occurs. In
such a case, the negative pledge applicable to the Notes (‘‘Applicable Negative Pledge’’) shall
become the alternative negative pledge (the ‘‘Alternative Negative Pledge’’) set-out in Condition
3(d) (Alternative Negative Pledge) with effect on and from the Negative Pledge Adjustment Date.
For this purpose, a ‘‘Rating Adjustment Event’’ means that the long-term unsubordinated debt or
deposit ratings assigned to the Issuer both are or both become investment grade in accordance with
the table below. If neither Moody’s Investors Service, Inc. (‘‘Moody’s’’) nor Fitch Ratings
(‘‘Fitch’’) has assigned such a rating to the Notes following the redemption of the Existing Notes,
the Issuer will use all reasonable efforts to ensure that another internationally recognised rating
agency provides such a rating for the Issuer (each, a ‘‘Substitute Agency’’).
Investment Grade Ratings Category
Moody’s Fitch Substitute Agency
Baa3 or higher BBB- or higher Its equivalent of Baa3/BBB- or higher
The ‘‘Negative Pledge Adjustment Date’’ is the first Business Day following the Rating
Adjustment Date (determined by reference to Central European Time). If there is a change to the
Applicable Negative Pledge, the Issuer will notify the London Stock Exchange and the UKLA.
The ‘‘Rating Adjustment Date’’ is the date on which the Existing Notes are redeemed if at the
time both of the long-term unsubordinated debt or deposit ratings assigned to the Issuer by
Moody’s and Fitch (or, if either Moody’s or Fitch no longer assigns such a rating, the remaining
agency which does provide such a rating and the Substitute Agency) are investment grade or, if
this is not the case, such later date on which Moody’s and Fitch or either of them and the
Substitute Agency (as the case may be) have announced that the long-term unsubordinated debt or
deposit rating assigned by it to the Issuer has become investment grade.
15
In the event that either Moody’s or Fitch or a Substitute Agency fails to or ceases to assign a rating
to the Issuer’s senior unsecured debt, the ratings assigned by the remaining rating agency shall be
deemed also to be the ratings assigned by the other rating agency.
(b) Existing Negative Pledge: So long as any Note remains outstanding (as defined in the Agency
Agreement), the Issuer shall not, and the Issuer shall procure that none of its Principal Subsidiaries
will, create or permit to subsist any Security Interest (other than a Permitted Security Interest)
upon the whole or any part of its present or future undertaking, assets or revenues (including
uncalled capital) to secure any Indebtedness or any Guarantee of Indebtedness, without (a) at the
same time or prior thereto securing the Notes equally and rateably therewith or (b) providing such
other security for the Notes as may be approved by an Extraordinary Resolution (as defined in the
Agency Agreement) of Noteholders.
(c) Definitions: Except in the case of the definition of ‘‘Permitted Security Interest’’ which is
applicable to this Condition 3(b) only, in these Conditions:
‘‘Development Organisation’’ means any of Asian Development Bank, European Bank for
Reconstruction and Development, International Bank for Reconstruction and Development,
International Finance Corporation or any other development finance institution established or
controlled by one or more states;
‘‘Guarantee’’ means, in relation to any Indebtedness of any Person, any obligation of another
Person to pay such Indebtedness including (without limitation):
(i) any obligation to purchase such Indebtedness;
(ii) any obligation to lend money, to purchase or subscribe shares or other securities or to
purchase assets or services in order to provide funds for the payment of such Indebtedness;
(iii) any indemnity against the consequences of a default in the payment of such Indebtedness;
and
(iv) any other agreement to be responsible for such Indebtedness;
‘‘Indebtedness’’ means any indebtedness of any Person for money borrowed or raised including
(without limitation) any indebtedness for or in respect of:
(i) amounts raised by acceptance under any acceptance credit facility;
(ii) amounts raised under any note purchase facility;
(iii) the amount of any liability in respect of leases or hire purchase contracts which would, in
accordance with applicable law and generally accepted accounting principles, be treated as
finance or capital leases;
(iv) the amount of any liability in respect of any purchase price for assets or services the
payment of which is deferred for a period in excess of 60 days; and
(v) amounts raised under any other transaction (including, without limitation, any forward sale
or purchase agreement) having the commercial effect of a borrowing;
‘‘Permitted Security Interest’’ means:
(i) any Security Interest in existence on the issue date of the Notes to the extent that it secures
Indebtedness outstanding on such date;
(ii) any Security Interest arising by operation of law and in the ordinary course of business of
the Issuer or any of its Principal Subsidiaries which does not (either alone or together with
any one or more other such Security Interests) materially impair the operation of such
business;
(iii) any Security Interest granted in connection with court proceedings (including as security
for costs and expenses in any such proceedings), so long as the claims secured thereby are
being contested in good faith by appropriate proceedings;
16
(iv) any Security Interest on property acquired (or deemed to be acquired) under a finance or
capital lease, or claims arising from the use or loss of or damage to such property, provided
that any such encumbrance secures only rentals and other amounts payable under such
lease;
(v) any Security Interest arising pursuant to any agreement (or other applicable terms and
conditions) which is standard or customary in the relevant market and in the ordinary
course of its banking business (and not for the purpose of raising credit or funds for the
operation of the Issuer or any Principal Subsidiary other than on a short-term basis as part
of the Issuer’s or Principal Subsidiary’s liquidity management activities), in connection
with (i) contracts entered into substantially simultaneously for sales and purchases at
market prices of commodities (including currency) or securities (including, but not limited
to, Repos), (ii) the establishment of margin deposits and similar collateral in connection
with any derivative or other trading transaction or (iii) proprietary trading activities
generally;
(vi) any Security Interest granted upon or with regard to any property hereafter acquired by the
Issuer or any Principal Subsidiary to secure the purchase price of such property or to secure
Indebtedness incurred solely for the purpose of financing the acquisition of such property
and transactional expenses related to such acquisition (other than a Security Interest
created in contemplation of such acquisition), provided that the maximum amount of
Indebtedness thereafter secured by such Security Interest does not exceed the purchase
price of such property (including transactional expenses) or the Indebtedness incurred
solely for the purpose of financing the acquisition of such property;
(vii) any Security Interest created or outstanding upon any property or assets (including current
and/or future revenues, accounts receivables and other payments) of the Issuer or any
Principal Subsidiary arising out of any securitisation of such property or assets or other
similar structured finance transaction in relation to such property or assets where the
primary source of payment of any obligations secured by such property or assets is the
proceeds of such property or assets (or where the payment of such obligations is otherwise
supported by such property or assets) and where recourse to the Issuer or the Principal
Subsidiary, as the case may be, in respect of such obligations does not extend to defaults by
the obligors in relation to such property or assets;
(viii) any Security Interest granted by the Issuer or any Principal Subsidiary in favour of a
Development Organisation to secure Indebtedness owed by the Issuer or such Principal
Subsidiary to such Development Organisation pursuant to any loan agreement or other
credit facility entered into with such Development Organisation, provided, however, that
the amount of Indebtedness so secured pursuant to this paragraph (h) shall not exceed in
aggregate an amount in any currency or currencies equivalent to 10 per cent. of the Issuer’s
loans and advances to customers before provisions for loan losses (calculated by reference
to the most recent audited consolidated financial statements of the Issuer prepared in
accordance with International Financial Reporting Standards);
(ix) any Security Interest created by a Principal Subsidiary to secure amounts owing to the
Issuer from that Principal Subsidiary;
(x) any Security Interest created by a company which is acquired by the Issuer after the date of
issue of the Notes provided that such Security Interest was created prior to the date of
acquisition:
(xi) any Security Interest existing over any property at the time of the acquisition of such
property by the Issuer or any Principal Subsidiary;
(xii) any right of set-off and any retention of title or other lien reserved by any seller of goods,
in each case arising under contracts entered into in the ordinary course of the Issuer’s or the
Principal Subsidiary’s business;
(xiii) any Security Interest arising pursuant to applicable legislation in any jurisdiction in which
the Issuer or a Principal Subsidiary carries on business over a pool of assets (including, but
17
not limited to, mortgage loans and public sector bonds) and securing any issue of debt
securities issued by the Issuer or any of its Principal Subsidiaries;
(xiv) any Security Interest arising out of the refinancing, extension, renewal or refunding of any
Indebtedness secured by a Permitted Security Interest, provided that the Indebtedness
thereafter secured by such Security Interest does not exceed the amount of the original
Indebtedness and such Security Interest is not extended to cover any property not
previously subject to such Security Interest; and
(xv) any Security Interest that does not fall within paragraphs (i) to (xiv) above and that secures
Indebtedness which, when aggregated does not exceed EUR 50,000,000 (or its equivalent
in other currencies);
provided that the aggregate amount of such obligations so secured pursuant to paragraphs (vii) and
(xiii) above at any one time (measured at the time of initial incurrence) shall not exceed an amount
in any currency or currencies equivalent to 25 per cent. of the Issuer’s loans and advances to
customers before provisions for loan losses (calculated by reference to the most recent audited
consolidated financial statements of the Issuer prepared in accordance with International Financial
Reporting Standards);
‘‘Person’’ means any individual, company, corporation, firm, partnership, joint venture,
association, organisation, state or agency of a state or other entity, whether or not having
separate legal personality;
‘‘Principal Subsidiary’’ means a Subsidiary of the Issuer whose (a) total profits, before tax and
extraordinary items, or (b) total value of assets represent in excess of 5 per cent. of the
consolidated total profits, before tax and extraordinary items of the Issuer and members of its
group, or, as the case may be, the total value of all consolidated assets owned by the Issuer and
members of its group, in each case calculated by reference to the latest audited financial statements
of each Subsidiary and the latest audited consolidated financial statements of the Issuer and its
Subsidiaries;
‘‘Repo’’ means a securities repurchase or resale agreement or reverse repurchase or resale
agreement, a securities borrowing agreement or any agreement relating to securities which is
similar in effect to any of the foregoing and, for purposes of this definition, the term ‘‘securities’’
means any capital stock, share, debenture or other debt or equity instrument, or other derivative,
whether issued by any private or public company, any government or agency or instrumentality
thereof or any supernational, international or multilateral or organisation;
‘‘Security Interest’’ means any mortgage, charge, pledge, lien or other security interest including,
without limitation, anything analogous to any of the foregoing under the laws of any jurisdiction;
and
‘‘Subsidiary’’ means, in relation to any Person (the ‘‘first Person’’) at any particular time, any
other Person (the ‘‘second Person’’):
(i) whose affairs and policies the first Person controls or has the power to control,
whether by ownership of share capital, contract, the power to appoint or remove
members of the governing body of the second Person or otherwise; or
(ii) whose financial statements are, in accordance with applicable law and generally
accepted accounting principles, consolidated with those of the first Person.
(d) Alternative Negative Pledge: So long as any Note remains outstanding (as defined in the Agency
Agreement), the Issuer shall not, and the Issuer shall procure that none of its Principal Subsidiaries
will, create or permit to subsist any Security Interest (other than a Permitted Security Interest)
upon the whole or any part of its present or future undertaking, assets or revenues (including
uncalled capital) to secure any Relevant Indebtedness or any Guarantee of Relevant Indebtedness,
without (a) at the same time or prior thereto securing the Notes equally and rateably therewith or
(b) providing such other security for the Notes as may be approved by an Extraordinary Resolution
(as defined in the Agency Agreement) of Noteholders.
18
In this Condition 3(d):
‘‘Permitted Security Interest’’ means:
(i) any Security Interest created or outstanding upon any property or assets (including current
and/or future revenues, accounts receivables and other payments) of the Issuer or any
Principal Subsidiary arising out of any securitisation of such property or assets or other
similar structured finance transaction in relation to such property or assets where the
primary source of payment of any obligations secured by such property or assets is the
proceeds of such property or assets (or where the payment of such obligations is otherwise
supported by such property or assets) and where recourse to the Issuer or the Principal
Subsidiary, as the case may be, in respect of such obligations does not extend to defaults by
the obligors in relation to such property or assets;
(ii) any Security Interest created by a company which is acquired by the Issuer after the date of
issue of the Notes provided that such Security Interest was created prior to the date of
acquisition:
(iii) any Security Interest arising pursuant to applicable legislation in any jurisdiction in which
the Issuer or a Principal Subsidiary carries on business over a pool of assets (including, but
not limited to, mortgage loans and public sector bonds) and securing any issue of debt
securities issued by the Issuer or any of its Principal Subsidiaries; and
(iv) any Security Interest arising out of the refinancing, extension, renewal or refunding of any
Indebtedness secured by a Permitted Security Interest, provided that such Security Interest
is itself a Permitted Security Interest; and
‘‘Relevant Indebtedness’’ means any Indebtedness which is in the form of or represented by any
bond, note, debenture, debenture stock, loan stock, certificate or other instrument which is, or is
capable of being, listed, quoted or traded on any stock exchange or in any securities market
(including, without limitation, any over-the-counter market).
4. INTEREST
The Notes bear interest from 5 May 2006 (the ‘‘Issue Date’’), at the rate of 5.625 per cent. per annum, (the
‘‘Rate of Interest’’) payable in arrear on 5 May in each year (each, an ‘‘Interest Payment Date’’),
subject as provided in Condition 6 (Payments).
Each Note will cease to bear interest from the due date for redemption unless, upon due presentation,
payment of principal is improperly withheld or refused, in which case it will continue to bear interest at
such rate (both before and after judgment) until whichever is the earlier of (a) the day on which all sums
due in respect of such Note up to that day are received by or on behalf of the relevant Noteholder and (b)
the day which is seven days after the Fiscal Agent has notified the Noteholders that it has received all
sums due in respect of the Notes up to such seventh day (except to the extent that there is any subsequent
default in payment).
The amount of interest payable on each Interest Payment Date shall be EUR 56.25 per EUR 1,000
principal amount of Notes. If interest is required to be paid in respect of a Note on any other date, it shall
be calculated by applying the Rate of Interest to the principal amount of such Note, multiplying the
product by the relevant Day Count Fraction and rounding the resulting figure to the nearest cent (half a
cent being rounded upwards), where:
‘‘Day Count Fraction’’ means, in respect of any period, the number of days in the relevant period, from
(and including) the first day in such period to (but excluding) the last day in such period, divided by the
number of days in the Regular Period in which the relevant period falls; and
‘‘Regular Period’’ means each period from (and including) the Issue Date or any Interest Payment Date
to (but excluding) the next Interest Payment Date.
19
5. REDEMPTION AND PURCHASE
(a) Scheduled redemption: Unless previously redeemed, or purchased and cancelled, the Notes will be
redeemed at their principal amount on 5 May 2011, subject as provided in Condition 6 (Payments).
(b) Redemption for tax reasons: The Notes may be redeemed at the option of the Issuer in whole, but
not in part, at any time, on giving not less than 30 nor more than 60 days’ notice to the Noteholders
(which notice shall be irrevocable), at their principal amount, together with interest accrued to the
date fixed for redemption, if:
(i) the Issuer has or will become obliged to pay additional amounts as provided or referred to
in Condition 7 (Taxation) as a result of any change in, or amendment to, the laws or
regulations of the Republic of Latvia or any political subdivision or any authority thereof
or therein having power to tax, or any change in the application or official interpretation of
such laws or regulations (including a holding by a court of competent jurisdiction), which
change or amendment becomes effective on or after 5 May 2006; and
(ii) such obligation cannot be avoided by the Issuer taking reasonable measures available to it;
provided, however, that no such notice of redemption shall be given earlier than 90 days prior to
the earliest date on which the Issuer would be obliged to pay such additional amounts if a payment
in respect of the Notes were then due.
Prior to the publication of any notice of redemption pursuant to this paragraph, the Issuer shall
deliver to the Fiscal Agent:
(A) a certificate signed by two directors of the Issuer stating that the Issuer is entitled to effect
such redemption and setting forth a statement of facts showing that the conditions
precedent to the right of the Issuer so to redeem have occurred; and
(B) an opinion of independent legal advisers of recognised standing to the effect that the Issuer
has or will become obliged to pay such additional amounts as a result of such change or
amendment.
Upon the expiry of any such notice as is referred to in this Condition 5(b), the Issuer shall be
bound to redeem the Notes in accordance with this Condition 5(b).
(c) No other redemption: The Issuer shall not be entitled to redeem the Notes otherwise than as
provided in paragraphs (a) (Scheduled Redemption) and (b) (Redemption for tax reasons) above.
(d) Purchase: The Issuer or any of its Subsidiaries may at any time purchase Notes in the open market
or otherwise and at any price.
(e) Cancellation: All Notes so redeemed or purchased by the Issuer or any of its Subsidiaries shall be
cancelled and may not be reissued or resold.
6. PAYMENTS
(a) Principal: Payments of principal shall be made by Euro cheque drawn on or, upon application by a
Holder of a Note to the Specified Office of the Fiscal Agent not later than the fifteenth day before
the due date for any such payment, by transfer to a Euro account (or other account to which Euro
may be credited or transferred) maintained by the payee with, a bank in a city in which banks have
access to the Trans-European Automated Real-time Gross settlement Express Transfer (TARGET)
system (the ‘‘TARGET System’’) and (in the case of redemption) upon surrender (or, in the case
of part payment only, endorsement) of the relevant Note Certificates at the Specified Office of any
Paying Agent.
(b) Interest: Payments of interest shall be made by Euro cheque drawn on, or upon application by a
Holder of a Note to the Specified Office of the Fiscal Agent not later than the fifteenth day before
the due date for any such payment, by transfer to a Euro account (or other account to which Euro
may be credited or transferred) maintained by the payee with, a bank in a city in which banks have
access to the TARGET System and (in the case of interest payable on redemption) upon surrender
(or, in the case of part payment only, endorsement) of the relevant Note Certificates at the
Specified Office of any Paying Agent.
20
(c) Payments subject to fiscal laws: All payments in respect of the Notes are subject in all cases to any
applicable fiscal or other laws and regulations in the place of payment, but without prejudice to the
provisions of Condition 7 (Taxation). No commissions or expenses shall be charged to the
Noteholders in respect of such payments.
(d) Payments on business days: Where payment is to be made by transfer to a Euro account (or other
account to which Euro may be credited or transferred), payment instructions (for value the due
date or, if the due date is not a business day, for value the next succeeding business day) will be
initiated and, where payment is to be made by cheque, the cheque will be mailed (i) (in the case of
payments of principal and interest payable on redemption) on the later of the due date for payment
and the day on which the relevant Note Certificate is surrendered (or, in the case of part payment
only, endorsed) at the Specified Office of a Paying Agent and (ii) (in the case of payments of
interest payable other than on redemption) on the due date for payment. A Holder of a Note shall
not be entitled to any interest or other payment in respect of any delay in payment resulting from
(A) the due date for a payment not being a business day or (B) a cheque mailed in accordance with
this Condition 6 (Payments) arriving after the due date for payment or being lost in the mail. In
this paragraph ‘‘business day’’ means:
(a) in the case of payment by transfer to a Euro account (or other account to which Euro may
be credited or transferred) as referred to above, any day which is a TARGET Settlement
Day; and
(b) in the case of surrender (or, in the case of part payment only, endorsement) of a Note
Certificate, any day on which banks are open for general business (including dealings in
foreign currencies) in the place in which the Note Certificate is surrendered (or, as the case
may be, endorsed); and
(c) ‘‘TARGET Settlement Day’’ means a day on which the TARGET System is open.
(e) Partial payments: If a Paying Agent makes a partial payment in respect of any Note, the Issuer
shall procure that the amount and date of such payment are noted on the Register and, in the case
of partial payment upon presentation of a Note Certificate, that a statement indicating the amount
and the date of such payment is endorsed on the relevant Note Certificate.
(f) Record date: Each payment in respect of a Note will be made to the person shown as the Holder in
the Register at the opening of business in the place of the Registrar’s Specified Office on the
fifteenth day before the due date for such payment (the ‘‘Record Date’’). Where payment in
respect of a Note is to be made by cheque, the cheque will be mailed to the address shown as the
address of the Holder in the Register at the opening of business on the relevant Record Date.
7. TAXATION
All payments of principal and interest in respect of the Notes by or on behalf of the Issuer shall be made
free and clear of, and without withholding or deduction for or on account of, any present or future taxes,
duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or
assessed by or on behalf of the Republic of Latvia or any political subdivision thereof or any authority
therein or thereof having power to tax, unless the withholding or deduction of such taxes, duties,
assessments or governmental charges is required by law. In that event the Issuer shall pay such additional
amounts as will result in receipt by the Noteholders after such withholding or deduction of such amounts
as would have been received by them had no such withholding or deduction been required, except that no
such additional amounts shall be payable in respect of any Note:
(a) held by a holder which is liable to such taxes, duties, assessments or governmental charges in
respect of such Note by reason of its having some connection with the Republic of Latvia other
than the mere holding of the Note; or
(b) where such withholding or deduction is imposed on a payment to an individual and is required to
be made pursuant to European Council Directive 2003/48/EC or any law implementing or
complying with, or introduced in order to conform to, such Directive; or
(c) held by a holder who would have been able to avoid such withholding or deduction by presenting
the relevant Note to another Paying Agent in a member state of the European Union; or
21
(d) where (in the case of a payment of principal or interest on redemption) the relevant Note
Certificate is surrendered for payment more than 30 days after the Relevant Date except to the
extent that the relevant holder would have been entitled to such additional amounts if it had
surrendered the relevant Note Certificate on the last day of such period of 30 days.
In these Conditions, ‘‘Relevant Date’’ means whichever is the later of (1) the date on which the payment
in question first becomes due and (2) if the full amount payable has not been received in a city in which
banks have access to the TARGET System by the Fiscal Agent on or prior to such due date, the date on
which (the full amount having been so received) notice to that effect has been given to the Noteholders.
Any reference in these Conditions to principal or interest shall be deemed to include any additional
amounts in respect of principal or interest (as the case may be) which may be payable under this
Condition 7 (Taxation).
If the Issuer becomes subject at any time to any taxing jurisdiction other than the Republic of Latvia,
references in these Conditions to the Republic of Latvia shall be construed as references to the Republic
of Latvia and/or (as the case may be) such other jurisdiction.
8. EVENTS OF DEFAULT
If any of the following events occurs:
(a) Non-payment: the Issuer fails to pay any amount of interest in respect of the Notes within 5
business days of the due date for payment thereof; or
(b) Breach of other obligations: the Issuer defaults in the performance or observance of any of its
other obligations under or in respect of the Notes and such default remains unremedied for 30 days
after written notice thereof, addressed to the Issuer by any Noteholder, has been delivered to the
Issuer or to the Specified Office of the Fiscal Agent; or
(c) Cross-default of Issuer or Principal Subsidiary:
(i) any Indebtedness of the Issuer or any of its Principal Subsidiaries is not paid when due or
(as the case may be) with in any originally applicable grace period;
(ii) any such Indebtedness becomes (or becomes capable of being declared) due and payable
prior to its stated maturity otherwise than at the option of the Issuer or (as the case may be)
the relevant Principal Subsidiary or (provided that no event of default, howsoever
described, has occurred) any person entitled to such Indebtedness; or
(iii) the Issuer or any of its Principal Subsidiaries fails to pay when due any amount payable by
it under any Guarantee of any Indebtedness; or
provided that the amount of Indebtedness referred to in sub-paragraph (i) and/or sub-paragraph (ii)
above and/or the amount payable under any Guarantee referred to in sub-paragraph (iii) above
individually or in the aggregate exceeds EUR 5,000,000 (or its equivalent in any other currency or
currencies); or
(d) Unsatisfied judgment: one or more judgment(s) or order(s) or arbitration award(s) for the payment
of an aggregate amount in excess of EUR 5,000,000 (or its equivalent in any other currency or
currencies) is rendered against the Issuer or any of its Principal Subsidiaries and, unless appealed
by the Issuer or the Principal Subsidiary, as the case may be, continue(s) unsatisfied and unstayed
for a period of 30 days after the date(s) thereof or, if later, the date therein specified for payment;
or
(e) Security enforced: a secured party takes possession, or a receiver, manager or other similar officer
is appointed, of the whole or any material part of the undertaking, assets and revenues of the Issuer
or any of its Principal Subsidiaries; or
(f) Insolvency, etc: (i) the Issuer or any of its Principal Subsidiaries becomes insolvent or is unable, or
admits its inability, to pay its debts (or any class of its debts) as they fall due or is deemed unable
to pay its debts (or any class thereof) pursuant to or for the purposes of any applicable law, (ii) an
administrator, receiver or liquidator of the Issuer or any of its Principal Subsidiaries or the whole
22
or any material part of the undertaking, assets and revenues of the Issuer or any of its Principal
Subsidiaries is appointed (iii) the Issuer or any of its Principal Subsidiaries takes any action for a
readjustment or deferment of any of its obligations or makes a general assignment or an
arrangement or composition with or for the benefit of its creditors (or any class of its creditors) or
declares a moratorium in respect of any of its Indebtedness or any Guarantee of any Indebtedness
given by it or (iv) the Issuer or any of its Principal Subsidiaries ceases or threatens to cease to carry
on all or any material part of its business (otherwise than, in the case of a Principal Subsidiary of
the Issuer, for the purposes of or pursuant to an amalgamation, reorganisation or restructuring
whilst solvent); or
(g) Winding up, etc: an order is made or an effective resolution is passed for the winding up,
liquidation or dissolution of the Issuer or any of its Principal Subsidiaries (otherwise than, in the
case of a Principal Subsidiary of the Issuer, for the purposes of or pursuant to an amalgamation,
reorganisation or restructuring whilst solvent); or
(h) Analogous event: any event occurs which under the laws of the Republic of Latvia has an
analogous effect to any of the events referred to in paragraphs (d) (Unsatisfied judgment) to (g)
(Winding up, etc.) above; or
(i) Failure to take action, etc: any action, condition or thing at any time required to be taken, fulfilled
or done in order (i) to enable the Issuer lawfully to enter into, exercise its rights and perform and
comply with its obligations under and in respect of the Notes, (ii) to ensure that those obligations
are legal, valid, binding and enforceable and (iii) to make the Notes admissible in evidence in the
courts of the Republic of Latvia is not taken, fulfilled or done; or
(j) Unlawfulness: it is or will become unlawful for the Issuer to perform or comply with any of its
obligations under or in respect of the Notes; or
(k) Revocation of licences: any of the material licences which the Issuer holds, or any of its Principal
Subsidiaries holds, and which are necessary for it to carry on its business, is terminated, revoked or
suspended and not replaced by a new licence or the licence is modified in a manner which
materially adversely affects the ability of the Issuer to make payments in respect of the Notes; or
(l) Government intervention: (i) all or a material part of the undertaking, assets and revenues of the
Issuer or any of its Principal Subsidiaries is condemned, seized or otherwise appropriated by any
person acting under the authority of any national, regional or local government or (ii) the Issuer or
any of its Principal Subsidiaries is prevented by any such person from exercising normal control
over all or a material part of its undertaking, assets and revenues,
then any Note may, by written notice addressed by the holder thereof to the Issuer and delivered to the
Issuer or to the Specified Office of the Fiscal Agent, be declared immediately due and payable, whereupon
it shall become immediately due and payable at its principal amount together with accrued interest
without further action or formality.
9. PRESCRIPTION
Claims for principal and interest upon redemption shall become void unless the relevant Note Certificates
are presented for payment within ten years of the appropriate Relevant Date.
10. REPLACEMENT OF NOTE CERTIFICATES
If any Note Certificate is lost, stolen, mutilated, defaced or destroyed, it may be replaced at the Specified
Office of the Registrar, subject to all applicable laws and stock exchange requirements, upon payment by
the claimant of the expenses incurred in connection with such replacement and on such terms as to
evidence, security, indemnity and otherwise as the Issuer may reasonably require. Mutilated or defaced
Notes Certificates must be surrendered before replacements will be issued.
11. AGENTS
In acting under the Agency Agreement and in connection with the Notes, the Agents act solely as agents
of the Issuer and do not assume any obligations towards or relationship of agency or trust for or with any
of the Noteholders.
23
The initial Agents and their initial Specified Offices are listed below. The Issuer reserves the right at any
time to vary or terminate the appointment of any Agent and to appoint a successor fiscal agent and/or
registrar and additional or successor paying agents and/or transfer agents; provided, however, that the
Issuer shall at all times maintain (a) a fiscal agent and a registrar (which may be the same entity), (b) a
paying agent and a transfer agent (which may be the same entity as the fiscal agent and the registrar)
having its Specified Office in London and (c), a paying agent in a member state of the European Union
that will not be obliged to withhold or deduct tax pursuant to the European Council Directive 2003/48/EC
or any law implementing or complying with, or introduced to conform to, such Directive.
Notice of any change in any of the Agents or in their Specified Offices shall promptly be given to the
Noteholders.
12. MEETINGS OF NOTEHOLDERS; MODIFICATION
(a) Meetings of Noteholders: The Agency Agreement contains provisions for convening meetings of
Noteholders to consider matters relating to the Notes, including the modification of any provision
of these Conditions. Any such modification may be made if sanctioned by an Extraordinary
Resolution. Such a meeting may be convened by the Issuer and shall be convened by it upon the
request in writing of Noteholders holding not less than one-tenth of the aggregate principal amount
of the outstanding Notes. The quorum at any meeting convened to vote on an Extraordinary
Resolution will be two or more persons holding or representing one more than half of the
aggregate principal amount of the outstanding Notes or, at any adjourned meeting, two or more
persons being or representing Noteholders whatever the principal amount of the Notes held or
represented; provided, however, that certain proposals (including any proposal to change any date
fixed for payment of principal or interest in respect of the Notes, to reduce the amount of principal
or interest payable on any date in respect of the Notes, to alter the method of calculating the
amount of any payment in respect of the Notes or the date for any such payment, to change the
currency of payments under the Notes or to change the quorum requirements relating to meetings
or the majority required to pass an Extraordinary Resolution (each, a ‘‘Reserved Matter’’)) may
only be sanctioned by an Extraordinary Resolution passed at a meeting of Noteholders at which
two or more persons holding or representing not less than three-quarters or, at any adjourned
meeting, one quarter of the aggregate principal amount of the outstanding Notes form a quorum.
Any Extraordinary Resolution duly passed at any such meeting shall be binding on all the
Noteholders, whether present or not.
(b) Modification: The Notes and these Conditions may be amended without the consent of the
Noteholders to correct a manifest error. In addition, the parties to the Agency Agreement may
agree to modify any provision thereof, but the Issuer shall not agree, without the consent of the
Noteholders, to any such modification unless it is of a formal, minor or technical nature, it is made
to correct a manifest error or it is, in the opinion of such parties, not materially prejudicial to the
interests of the Noteholders.
13. FURTHER ISSUES
The Issuer may from time to time, without the consent of the Noteholders, create and issue further notes
having the same terms and conditions as the Notes in all respects (or in all respects except for the first
payment of interest) so as to form a single series with the Notes.
14. NOTICES
Notices to the Noteholders will be sent to them by first class mail (or its equivalent) or (if posted to an
overseas address) by airmail at their respective addresses on the Register. Any such notice shall be
deemed to have been given on the fourth day after the date of mailing.
24
15. CURRENCY INDEMNITY
If any sum due from the Issuer in respect of the Notes or any order or judgment given or made in relation
thereto has to be converted from the currency (the ‘‘first currency’’) in which the same is payable under
these Conditions or such order or judgment into another currency (the ‘‘second currency’’) for the
purpose of (a) making or filing a claim or proof against the Issuer, (b) obtaining an order or judgment in
any court or other tribunal or (c) enforcing any order or judgment given or made in relation to the Notes,
the Issuer shall indemnify each Noteholder, on the written demand of such Noteholder addressed to the
Issuer and delivered to the Issuer or to the Specified Office of the Fiscal Agent, against any loss suffered
as a result of any discrepancy between (i) the rate of exchange used for such purpose to convert the sum in
question from the first currency into the second currency and (ii) the rate or rates of exchange at which
such Noteholder may in the ordinary course of business purchase the first currency with the second
currency upon receipt of a sum paid to it in satisfaction, in whole or in part, of any such order, judgment,
claim or proof.
This indemnity constitutes a separate and independent obligation of the Issuer and shall give rise to a
separate and independent cause of action.
16. GOVERNING LAW, JURISDICTION AND ARBITRATION
(a) Governing law: The Notes and all matters arising from or connected with the Notes are governed
by, and shall be construed in accordance with, English law.
(b) Arbitration: The Issuer agrees that any dispute or difference of whatever nature howsoever arising
under, out of or in connection with the Notes (including a dispute or difference as to the breach,
existence or validity of the Notes) (each a ‘‘Dispute’’) involving a Noteholder shall, if the
Noteholder so elects, be settled by arbitration in accordance with the provisions of this Condition
16(b). Any election by a Noteholder shall be made by written notice to the Issuer and, if court
proceedings have already been started, must be made before the Noteholder takes any steps with
regard to the substantive claim made in those proceedings.
If a Dispute is to be settled by arbitration in accordance with this Condition 16(b), the arbitration
shall be in accordance with the UNCITRAL Arbitration Rules (the ‘‘Rules’’) as at present in force
by a panel of three arbitrators (or a sole arbitrator if the parties so agree) appointed in accordance
with the Rules. The seat and place of any arbitration shall be London, England. The language of
any arbitral proceedings shall be English. The appointing authority for the purposes set forth in
Article 7(2) of the Rules shall be the London Court of International Arbitration.
In absence of any written notice as contemplated by this Condition 16(b), the provisions of
Condition 16(c), (d), (e) and (f) shall apply.
(c) English courts: The courts of England have exclusive jurisdiction to settle any Dispute arising
from or connected with the Notes.
(d) Appropriate forum: The Issuer agrees that the courts of England are the most appropriate and
convenient courts to settle any Dispute and, accordingly, that it will not argue to the contrary.
(e) Rights of the Noteholders to take proceedings outside England: Condition 16(c) (English courts) is
for the benefit of the Noteholders only. As a result, nothing in this Condition 16 (Governing law
and jurisdiction) prevents any Noteholder from taking proceedings relating to a Dispute
(‘‘Proceedings’’) in any other courts with jurisdiction. To the extent allowed by law, Noteholders
may take concurrent Proceedings in any number of jurisdictions.
(f) Process agent: The Issuer agrees that the documents which start any Proceedings and any other
documents required to be served in relation to those Proceedings may be served on it by being
delivered to Oury Clark Solicitors at 10 John Street, London WC1N 2EB or, if different, its
registered office for the time being or at any address of the Issuer in Great Britain at which process
may be served on it in accordance with Part XXIII of the Companies Act 1985. If such person is
not or ceases to be effectively appointed to accept service of process on behalf of the Issuer, the
Issuer shall, on the written demand of any Noteholder addressed to the Issuer and delivered to the
Issuer or to the Specified Office of the Fiscal Agent appoint a further person in England to accept
service of process on its behalf and, failing such appointment within 15 days, any Noteholder shall
be entitled to appoint such a person by written notice addressed to the Issuer and delivered to the
25
Issuer or to the Specified Office of the Fiscal Agent. Nothing in this paragraph shall affect the right
of any Noteholder to serve process in any other manner permitted by law. This Condition applies
to Proceedings in England.
There will appear at the foot of the Conditions endorsed on or (as the case may be) attached to the Global
Note Certificate the names and Specified Offices of the Agents as set out at the end of this Prospectus.
26
SUMMARY OF PROVISIONS
RELATING TO THE NOTES IN GLOBAL FORM
The Notes will be represented by a Global Note Certificate which will be registered in the name of Chase
Nominees Limited as nominee for, and deposited with, a common depositary for Euroclear and Clearstream,
Luxembourg.
The Global Note Certificate will become exchangeable in whole, but not in part, for Individual Note Certificates
(‘‘Individual Note Certificates’’) if (a) Euroclear or Clearstream, Luxembourg is closed for business for a
continuous period of 14 days (other than by reason of legal holidays) or announces an intention permanently to
cease business or (b) any of the circumstances described in Condition 8 (Events of Default) occurs.
Whenever the Global Note Certificate is to be exchanged for Individual Note Certificates, such Individual Note
Certificates will be issued in an aggregate principal amount equal to the principal amount of the Global Note
Certificate within five business days of the delivery by or on behalf of the registered holder of the Global Note
Certificate, Euroclear and/or Clearstream, Luxembourg to the Registrar of such information as is required to
complete and deliver such Individual Note Certificates (including, without limitation, the names and addresses of
the persons in whose names the Individual Note Certificates are to be registered and the principal amount of each
such person’s holding) against the surrender of the Global Note Certificate at the Specified Office of the
Registrar. Such exchange will be effected in accordance with the provisions of the Agency Agreement and the
regulations concerning the transfer and registration of Notes scheduled thereto and, in particular, shall be effected
without charge to any holder, but against such indemnity as the Registrar may require in respect of any tax or
other duty of whatsoever nature which may be levied or imposed in connection with such exchange.
If:
(a) Individual Note Certificates have not been issued and delivered by 5.00 p.m. (London time) on the
thirtieth day after the date on which the same are due to be issued and delivered in accordance with the
terms of the Global Note Certificate; or
(b) any of the Notes evidenced by the Global Note Certificate has become due and payable in accordance
with the Conditions or the date for final redemption of the Notes has occurred and, in either case, payment
in full of the amount of principal falling due with all accrued interest thereon has not been made to the
Holder of the Global Note Certificate on the due date for payment in accordance with the terms of the
Global Note Certificate,
then the Global Note Certificate (including the obligation to deliver Individual Note Certificates) will become
void at 5.00 p.m. (London time) on such thirtieth day (in the case of (a) above) or at 5.00 p.m. (London time) on
such due date (in the case of (b) above) and the Holder will have no further rights thereunder (but without
prejudice to the rights which the Holder or others may have under the deed of covenant dated 5 May 2006, (the
‘‘Deed of Covenant’’)). Under the Deed of Covenant, persons shown in the records of Euroclear and/or
Clearstream, Luxembourg as being entitled to interests in the Notes will acquire directly against the Issuer all
those rights to which they would have been entitled if, immediately before the Global Note Certificate became
void, they had been the registered Holders of Notes in an aggregate principal amount equal to the principal
amount of Notes they were shown as holding in the records of Euroclear and/or (as the case may be) Clearstream,
Luxembourg.
In addition, the Global Note Certificate will contain provisions which modify the Terms and Conditions of the
Notes as they apply to the Notes evidenced by the Global Note Certificate. The following is a summary of certain
of those provisions:
Notices: Notwithstanding Condition 14 (Notices), so long as the Global Note Certificate is held on behalf of a
common depositary for Euroclear and Clearstream, Luxembourg, notices to Noteholders represented by the
Global Note Certificate may be given by delivery of the relevant notice to Euroclear and Clearstream,
Luxembourg and, in any case, such notices shall be deemed to have been given to the Noteholders in accordance
with Condition 14 (Notices) on the date of delivery to Euroclear and Clearstream, Luxembourg.
Denominations and minimum trading amount: The Notes are in the denomination of EUR 50,000 and integral
multiples of EUR 1,000 in excess thereof. For so long as the Notes are represented by a Global Note and the
relevant clearing system(s) so permit, the Notes shall be tradable in such denominations, subject always to the
minimum denomination and trading amount of EUR 50,000. Individual Note Certificates (if issued) will be
printed in denominations of EUR 50,000 and integral multiples of EUR 1,000 in excess thereof.
27
EXCHANGE RATE INFORMATION
The following table sets forth, for the periods and dates indicated, certain information regarding the Midpoint
Rate for Latvian Lats, expressed in euros per Lat. The term ‘‘Midpoint Rate’’ means the rate fixed by the National
Bank of Latvia on the relevant date. The inclusion of such translations is not intended to suggest that the Lat
amounts actually represent such euro amounts or that such amounts could have been converted into euro at such
rate or any other rate. Since 1 January 2005 the Lat has been pegged to the euro at a rate of LVL 1: Euro 1.42287.
The Bank of Latvia has committed that the market rate of the Lat will not differ more than plus 1% or minus 1%
from the peg rate.
The following table sets forth historical lat/euro exchange rates for the periods indicated.
Year ended 31 December
2005 2004 2003 2002
(LVL/EUR) (LVL/EUR) (LVL/EUR) (LVL/EUR)
Exchange rate at end of period 0.703 0.703 0.674 0.610
Average exchange rate during period* 0.703 0.671 0.645 0.583
Highest exchange rate during period 0.703 0.703 0.674 0.611
Lowest exchange rate during period 0.703 0.652 0.614 0.555
Source: National Bank of Latvia
* The average of the Midpoint Rate as published by the National Bank of Latvia on the last business day of each month during the
applicable period.
28
USE OF PROCEEDS
The Net Proceeds of the issue of the Notes, expected to amount to Euro 198,880,000 (before expenses), will be
used by the Issuer for general corporate purposes which include making a profit.
The total expenses relating to the admission to listing and trading are estimated to be approximately Euro 9,706.
29
FINANCIAL REVIEW
The following discussion should be read in conjunction with the Bank’s consolidated and separate financial
statements included elsewhere in this document (the ‘‘Financial Statements’’). Unless otherwise specified, the
financial data discussed below have been extracted without material adjustment from the consolidated financial
statements which have been prepared in accordance with IFRS.
References in this financial review to ‘‘2004’’ and ‘‘2005’’ and other years are, unless otherwise stated, to the
12 months ended 31st December in each of those years and references to ‘‘average balances’’ are references to
the average of amounts at the start and end of each year. As a result of rounding, the totals stated in the tables
below may not be an exact arithmetical sum of the numbers in respect of which they are expressed to be a total.
Overview
According to data prepared by the Association of Latvian Commercial Banks, the Bank is the largest commercial
bank in Latvia in terms of customer deposits and the third largest in terms of both total assets and of loans and
advances to customers, which, at 31 December 2005, were LVL 1,252 million, LVL 1,757 million and LVL 811
million, respectively. As at 31 December 2005, according to the same source, the Bank had a 19.8% market share
of customer deposits, a 16.3% market share of total assets and an 11.9% market share of loans and advances to
customers in Latvia.
The Bank is the parent company of a group of companies comprising 25 consolidated and one non-consolidated
subsidiary at 31 December 2005. Details of the Bank’s subsidiaries are set out in note 20 to the Financial
Statements. The Bank conducts banking business in Latvia and, to a limited extent, elsewhere through its branch
network. Other Group companies conduct a banking business in Lithuania, leasing businesses in Latvia,
Lithuania, Estonia and a range of countries in the Commonwealth of Independent States (the ‘‘CIS’’) and asset
management businesses in Latvia, Russia and the Ukraine. As at 31 December 2005, 91.7% of the Group’s gross
interest and commission and fee income and 92.8% of its profit before tax (including intra-group transactions)
was earned by the Bank and its subsidiaries in Latvia; see also note 39 to the Financial Statements.
The principal revenue earning activities of the Group comprise lending (including leasing, which generates both
interest and commission income), customer service (including the provision of plastic cards, effecting payment
transfers and a range of other services) which principally generate commissions and fees and investing in and
trading fixed income securities (which generates both interest income and trading profits) and foreign exchange
trading (which generates trading profits).
As at 31 December 2005, the Group had total assets of LVL 1,842.3 billion, total net loans and advances to
customers of LVL 879.3 million and total deposits from customers of LVL 1,317.9 million. For the year ended
31 December 2005, the Group had net operating income of LVL 89.8 million. A prudent approach to risk
management and the ability to take advantage of market opportunities helped the Group to achieve its ninth
consecutive year of record profits which, in 2005, amounted to LVL 33.2 million, 102% higher than the profits for
the previous year. As a result, the Group’s shareholders’ equity reached LVL 158.1 million as at 31 December
2005. The Group’s return on average assets for 2005 was 2.03% and its return on average equity was 23.35% in
that year (compared with 1.32% and 14.03%, respectively in 2004). The Group’s net interest margin remained
stable at 3.04% in 2005.
The Group’s net operating income is principally derived from three sources: net interest income, net commission
and fee income and net profit from trading. The table below sets out certain information in relation to these
components of the Group’s consolidated net income for each of the years indicated.
Year ended 31 December
2005 2004
(LVL millions) (% of total) (LVL millions) (% of total)
Net interest income 46.5 51.8 38.7 53.3
Net commission and fee income 25.7 28.6 18.8 25.9
Net profit from trading 15.5 17.3 13.2 18.2
Other operating income 2.1 2.3 1.9 2.6
Total net operating income 89.8 100.0 72.6 100.0
30
Significant Factors Affecting Results of Operations
Adoption of IFRS 3 and IAS 27
In 2005, the Group adopted IFRS 3 ‘‘Business Combinations’’ and IAS 27 ‘‘Consolidated and Separate Financial
Statements’’, each of which had a substantial effect on the Group’s accounting policies. As a result of the
adoption of IFRS 3 (and related IAS 36 and IAS 38), the Group ceased amortising goodwill from 1 January 2005
(previously goodwill had been amortised on a straight-line basis) and eliminated the accumulated amortisation at
31 December 2004 with a corresponding decrease in the cost of goodwill. As a result of the adoption of IAS 27,
with effect from 1 January 2005 investments in subsidiaries ceased to be accounted for under the equity method
and retained earnings of subsidiaries were reversed to equity. As a result, the net book value of investments in
subsidiaries and comparative figures were restated.
The table below shows the effects of the adoption of these two standards on the Bank’s non-consolidated financial
statements at 31 December 2004.
31 December 2004
As reported Restatements Restated
(LVL thousands)
Balance Sheet
Investment into subsidiaries 18,369 190 18,559
Intangible assets 3,318 (1,404) 1,914
Total shareholders’ equity
Fair value revaluation reserve (3,867) 150 (3,717)
Unappropriated retained earnings (28,334) (284) (28,618)
Net profit for the year (16,452) 1,348 (15,104)
Statement of Income
Net result (16,452) 1,348 (15,104)
Depreciation and amortisation expense 5,841 (261) 5,580
Profit from investments in subsidiaries (1,609) 1,609 —
The Group expects that it will apply IFRS 7 ‘‘Financial Instruments: Disclosures’’ and IAS 1 amendment
‘‘Capital Disclosures’’ with effect from 1 January 2007 and that this will affect the presentation of its financial
statements for 2007 onwards, see note 2 to the Financial Statements.
Critical Accounting Policies
Certain accounting policies for the Group’s business involve management estimates and assumptions that affect
the reported amounts of assets, liabilities, income and expenses and disclosure of contingencies. The most
important of these accounting policies are discussed below. For more information on the Group’s accounting
policies and the use of estimates in the preparation of the Financial Statements, see note 2 (and, in particular,
2(w)) to the Financial Statements.
Loan impairment
All loans and advances are recognised when advanced and measured at amortised cost using the effective interest
method.
Allowances for loan impairment are established (i) in relation to individual loans if there is objective evidence
that the Group will not be able to collect the amounts due according to the original contractual terms and (ii) at a
portfolio level as described below. The amount of the allowance in (i) above is the difference between the
carrying amount and the estimated recoverable amount, calculated as the present value of expected cash flows,
including amounts recoverable from guarantees and collateral, discounted based on the instrument’s effective
interest rate at inception. The allowance in (ii) above is estimated based upon historical patterns of losses in the
loan portfolio but also takes account of credit concentrations, changes in collateral values, current economic
conditions and general market or operating events that have occurred which might negatively impact future cash
flows but do not, in themselves, give rise to a quantifiable specific allowance under (i) above. The determination
of the allowance for loan impairment may involve a significant amount of management discretion.
When a loan is uncollectable, it is written off against the related allowance for impairment. Such loans are written
off after all the necessary legal procedures have been completed and the amount of the loss has been determined.
Recoveries of amounts previously written off are treated as income to the extent that the carrying value of the
asset does not exceed its amortised cost at the date of the reversal.
31
Results of Operations for the years ended 31 December 2005 and 2004
Net Interest Income
The following table sets out the Group’s consolidated interest income, interest expense and the resulting net
interest income for each of the years indicated.
Year ended 31 December Variation
2005 2004 2005/2004
(LVL millions) (%)
Interest income 78.9 58.5 34.9
Interest expense (32.4) (19.8) 63.6
Net interest income 46.5 38.7 20.2
Interest Income
The following table sets out the principal components of the Group’s consolidated interest income for each of the
years indicated.
Year ended 31 December Variation
2005 2004 2005/2004
(LVL millions) (%)
Interest on balances due from credit institutions and central
banks 5.8 3.6 61.1
Interest on loans and advances to customers 51.6 37.0 39.5
Interest on fixed income securities 19.7 17.7 11.3
Interest on other financial instruments 1.8 0.3 500.0
Total interest income 78.9 58.6 34.9
The Group principally derives interest income from loans and advances which it makes to its customers and from
its investments in fixed income securities. Together, these two sources accounted for 90.4% of the Group’s total
interest income in 2005 compared to 93.3% in 2004.
Interest income increased in 2005 by LVL 20.4 million, or 34.9%, as compared to 2004. This increase was
principally due to an increase in interest income from loans and advances to customers principally reflecting the
increase in the loans portfolio during the period. The average balance of net loans and advances to customers in
2005 was LVL 785.5 million compared to LVL 583.6 million in 2004, an increase of 34.6%. The average rate of
interest earned on the portfolio was 6.6% in 2005 compared to 6.4% in 2004.
Interest income on fixed income securities increased by 11.3% from 2004 to 2005 principally reflecting an
increase in the size of the portfolio during the period. The average size of the fixed income portfolio was
LVL 365.4 million in 2005 compared to LVL 323.3 million in 2004, an increase of 13.0%. The average rate of
interest earned on the portfolio was 5.4% in 2005 compared to 5.5% in 2004.
Interest Expense
The following table sets out the principal components of the Group’s consolidated interest expense for each of the
years indicated.
Year ended 31 December Variation
2005 2004 2005/2004
(LVL millions) (%)
Interest on balances due to credit institutions and central banks (4.9) (2.8) 75.0
Interest on deposits from customers (24.1) (15.2) 58.6
Interest on issued debt securities (1.9) — —
Interest on other financial instruments (1.5) (1.8) (20.0)
Total interest income (32.4) (19.8) 63.6
The Group principally pays interest on deposits made by its customers. This source accounted for 74.4% of the
Group’s total interest expense in 2005 compared to 76.8% in 2004. In 2005, the Group issued interest bearing
securities which contributed to the slight decline indicated above.
Interest expense increased in 2005 by LVL 12.6 million, or 63.6%, compared to 2004. This increase was
principally due to an increase in interest expense on customer deposits reflecting an increase in deposits during
32
the period and an increase in interest rates paid. The average balance of customer deposits in 2005 was
LVL 1,211.7 million compared to LVL 970.6 million in 2004, an increase of 24.8%. The average rate of interest
paid on customer deposits was 2.0% in 2005 compared to 1.6% in 2004.
Interest expense also increased as a result of the debt securities issued by the Bank in March and June 2005. The
Bank anticipates that this source of interest expense will increase further in 2006 reflecting both a full year’s
interest paid on securities issued in 2005 as well as the interest expense incurred on securities (including the
Notes) issued during 2006.
Net Interest Income and Interest Margin
The Group’s net interest income in 2005 increased by 20.2% to LVL 46.5 million from LVL 38.7 million in 2004.
The Group’s net interest margin (defined as net interest income divided by the average of total interest earning
assets) was 3.04% in 2005 as compared to 3.38% in 2004. The Group’s interest spread (defined as the difference
between the rate of interest earned on average interest earning assets and the rate of interest paid on average
interest bearing liabilities) was 2.92% in 2005 compared to 3.31% in 2004.
Net Commission and Fee Income
The following table sets out the Group’s consolidated commission and fee income, commission and fee expense
and the resulting net commission and fee income for each of the years indicated.
Year ended 31 December Variation
2005 2004 2005/2004
(LVL millions) (%)
Commission and fee income 32.5 23.9 36.0
Commission and fee expense (6.8) (5.1) 33.3
Net commission and fee income 25.7 18.8 36.7
Commission and Fee Income
The following table sets out the principal components of the Group’s consolidated commission and fee income
for the years indicated.
Year ended 31 December Variation
2005 2004 2005/2004
(LVL millions) (%)
Transactions with settlement cards 11.1 8.9 24.7
Payment transfer fees 9.5 8.2 15.9
Review of loan applications and collateral evaluation 3.1 2.0 55.0
Financial consulting fees 2.9 — —
Securities 2.5 1.6 56.3
Cash disbursement/transaction commission 1.1 1.1 —
Service fee for account maintenance 0.9 0.8 12.5
Letters of credit and guarantees 0.7 0.4 75.0
Cash collection 0.4 0.3 33.3
Other 0.3 0.4 (25.0)
Total commission and fee income 32.5 23.7 37.1
The Group derives commission and fee income principally from transactions made using debit and credit cards
issued by it and from fees charged for payment transfers. In relation to its plastic cards, the principal revenue
items are annual fees, ATM withdrawal charges and foreign exchange charges together with commissions
received from merchants with whom the cards are used. Payment transfers generate commission and fee income
principally through the charges levied for effecting money transfers as well as from fees received by the Group
for maintaining third party correspondent accounts. Together, these two sources accounted for 63.4% of the
Group’s total commission and fee income in 2005 compared to 71.5% in 2004. Other significant sources of
commission income in 2005 were loan fees (charged on the grant of a loan and including fees for collateral
valuation where applicable) which include the Group’s fees earned from investment banking activities such as
loan syndication and securities underwriting; financial consulting fees (being the fees charged by it for arranging
finance for third parties as part of its investment banking activities); and brokerage fees for trading securities on
behalf of its clients (referred to as Securities in the table above and including fees earned by PAM,
33
see ‘‘Description of the Group – Core Business – Asset Management’’). These sources accounted for 9.5%, 8.9%
and 7.7%, respectively, of total commission and fee income in 2005.
Commission and fee income from card transactions increased by 24.7% in 2005 from LVL 8.9 million in 2004 to
LVL 11.1 million in 2005. This increase reflected an increase in the number of cards issued by the Group
(the average number of cards issued by the Group was approximately 489,300 in 2005 compared to
approximately 359,700 in 2004) and the marketing efforts undertaken by the Group to promote the use of its
cards.
Commission and fee income from payment transfers increased by 15.9% in 2005 from LVL 8.2 million in 2004
to LVL 9.5 million in 2005. This increase principally reflected increased volumes of business.
The increase in loan fees is principally attributable to the increase in the loan portfolio referred to above as
commission rates generally declined slightly over the period. Financial consulting fees charged in 2005 related to
a one-off transaction and income from securities increased as a result of increased client trading.
Commission and Fee Expense
The following table sets out the principal components of the Group’s consolidated commission and fee expense
for the years indicated.
Year ended 31 December Variation
2005 2004 2005/2004
(LVL millions) (%)
Fees related to settlement card operations (3.6) (2.5) 44.0
Fees related to correspondent accounts (2.1) (2.0) 5.0
Brokerage and custodian fees (1.0) (0.6) 66.7
Total commission and fee expense (6.7) (5.1) 31.3
The Group pays a range of fees in connection with the cards issued by it, including fees to card settlement
organisations and other banks whose ATMs and point of sale terminals have been used by the Group’s customers,
to banks with which it holds correspondent accounts and to brokers and custodians who trade and hold securities
on its behalf. The principal cause of the increase in its commission and fee expense in 2005 was increased fees
paid in respect of its plastic cards reflecting the increased amount of transactions made using cards issued by the
Group.
Net Profit from Trading Activities
The following table sets out the principal components of the Group’s net profit from trading for each of the years
indicated.
Year ended 31 December Variation
2005 2004 2005/2004
(LVL millions) (%)
Profit from trading and revaluation of trading securities 3.6 1.5 140.0
Profit from sale of available for sale securities 4.3 5.6 (23.2)
Profit from foreign exchange trading and revaluation of open
positions 8.7 6.5 33.8
(Loss) on trading and revaluation of other financial instruments (1.1) (0.4) 175.0
Total net profit on trading activities 15.5 13.2 17.4
The Group’s trading profits are principally derived from transactions involving its securities portfolio and foreign
exchange trading. Net profit is derived from securities transactions both through the sale of trading and available
for sale securities and through the marking to market of securities in the trading portfolio. Although securities in
the available for sale portfolio are also marked to market, the result is (pending any sale of the securities)
recognised in equity as a fair value revaluation reserve, see note 2(j) to the Financial Statements.
The Group’s trading portfolio of fixed income securities, which constitutes its proprietary trading portfolio, was
LVL 24.2 million at 31 December 2005. The Group also has small portfolios of non fixed income trading
securities, although these are not actively traded. See ‘‘Financial Condition as at 31 December 2005 and 2004 —
Securities’’ below. The Group uses its available for sale portfolio principally to manage its liquidity risk in
relation to its loan portfolio which generally has longer-term maturities than its customer deposits, which are the
principal funding source of the loans and advances made by the Group. In 2005, net profit derived from the
34
trading portfolio increased by 140.0% compared with 2004 to LVL 3.6 million, reflecting profits made when
securities in the portfolio are traded as well as the marking to market of the trading securities portfolio. By
contrast, net profit derived from the available for sale portfolio in 2005 decreased by 23.2% compared with 2004.
This represents losses made on trading, although, as indicated above, trading in this portfolio is principally
undertaken as part of the Group’s liquidity risk management.
Net profit derived from foreign exchange transactions increased by 33.8% in 2005 when compared to 2004,
reflecting increased business volumes.
Other Operating Income
The Group’s other operating income principally comprises penalty interest paid on overdue loans and advances
and card balances as well as penalties levied on early termination of fixed term deposits.
Operating Expenses
The following table sets forth the principal components of the Group’s consolidated operating expenses for the
years indicated.
Year ended 31 December Variation
2005 2004 2005/2004
(LVL millions) (%)
Personnel expense (24.8) (20.7) 19.8
Depreciation and amortisation expense (6.3) (6.3) —
Other (23.7) (18.5) 28.1
Total operating expenses (54.8) (45.5) 20.4
As a percentage of net operating income, the Group’s operating expenses were 61.1% in 2005 and 62.7% in 2004.
The Group’s operating expenses principally comprise personnel expense and depreciation and amortisation
expense which together accounted for 56.8% and 59.3% of its total operating expense in 2005 and 2004,
respectively. The Group incurs a range of other operating expenses, none of which are individually significant,
which are detailed in note 8 to the Financial Statements.
Personnel Expense
Personnel expense increased by LVL 4.1 million, or 19.8%, in 2005 compared to 2004. This increase was
primarily caused by an increase in the number of employees reflecting the growth of the Group’s branch network
and the addition of new subsidiaries as well as salary increases. The Group employed an average of 2,438 staff
during 2005 and an average of 2,216 during 2004, an increase of 10.0%. The personnel expense per average
employee was LVL 10,172 in 2005 compared to LVL 9,341 in 2004, an increase of 8.9%. As a percentage of total
operating costs, personnel expense was 45.3% in 2005 and 45.5% in 2004.
Depreciation and Amortisation Expenses
Depreciation and amortisation expenses remained constant during 2004 and 2005. As a percentage of total
operating costs, depreciation and amortisation expenses were 11.5% in 2005 and 13.8% in 2004.
Impairment
The Group’s impairment change was LVL 2.7 million in 2005 and LVL 9.1 million in 2004. Financial assets
principally comprise loans and advances to customers and fixed income securities. As a percentage of the total of
these assets at the year end, the allowance for impairment decreased from 0.9% in 2004 to 0.2% in 2005
reflecting the Group’s historically prudent provisioning levels and the quality of the portfolio.
In 2004, the Group released LVL 1.0 million of impairment previously charged to the income statement,
reflecting unanticipated amounts recovered in respect of assets which had been provided for. In 2005,
LVL 5.3 million of previously charged impairment was released.
Taxation
The Group’s total income tax increased to LVL 4.4 million in 2005 from LVL 2.2 million in 2004, reflecting the
increase in its taxable profit over the two years. Corporate income tax in Latvia in both 2005 and 2004 was
charged at a rate of 15%. The Group’s effective tax rate was 11.6% in 2005 and 11.8% in 2004. The Group’s
35
effective tax rate was below the Latvian corporate tax rate in each year reflecting tax deductible donations and
other expenses made and incurred by the Group, see note 11 to the Financial Statements.
Financial Condition as at 31 December 2005 and 2004
Total Assets
As at 31 December 2005, the Group had total assets of LVL 1,842.3 million as compared to LVL 1,424.5 million
at 31 December 2004. The increase at the end of 2005 principally reflected increases in loans and advances to
customers, in fixed income securities and in cash and deposits with central banks.
Cash and Deposits with Central Banks
As at 31 December 2005, the Group had cash and deposits with central banks of LVL 144.1 million, including
deposits with the Bank of Latvia of LVL 99.3 million. The corresponding numbers at the end of 2004 were LVL
70.8 million and LVL 34.4 million, respectively. During 2005, the Bank of Latvia increased its reserve
requirements with a view to helping it manage inflation. At the same time, the Bank of Latvia began to pay
interest on certain reserves deposited with it. The Group’s cash and deposits with central banks were 7.8% of its
total assets at 31 December 2005 as compared to 5.0% at 31 December 2004.
Loans and Advances to Customers
As at 31 December 2005, the Group had loans and advances to customers of LVL 879.3 million as compared to
LVL 691.7 million at 31 December 2004. The increase at the end of 2005 was mainly the result of an increase in
available funding and generally strong demand for loans by the Group’s customers. As a percentage of total
assets, loans and advances to customers were 47.7% at 31 December 2005 and 48.6% at 31 December 2004.
Information on the Group’s loan portfolio is set out in ‘‘Lending and Selected Statistical Information’’ below.
Securities
As at 31 December 2005, the Group had fixed income securities of LVL 432.1 million as compared to
LVL 298.8 million at 31 December 2004. The increase at the end of 2005 reflected the fact that as deposits grew
faster than loans in 2005 the Group had correspondingly more cash to invest in its liquid fixed income securities
portfolio. As a percentage of total assets, the Group’s fixed income securities portfolio was 23.5% at
31 December 2005 and 21.0% at 31 December 2004. Information on the Group’s fixed income securities
portfolio is set out in ‘‘Lending and Selected Statistical Information’’ below.
As at 31 December 2005, the Group also held shares and other non-fixed income securities of LVL 30.5 million
as compared to LVL 11.5 million at 31 December 2004.
The table below shows certain information in relation to the Group’s securities as at the dates indicated.
As at 31 December
2005 2004
(LVL millions)
Fixed income securities
Held for trading 24.2 17.9
Available for sale 342.5 245.3
Held to maturity 68.0 42.7
Total fixed income securities
(1)
434.7 305.9
Equity securities
Held for trading 15.2 4.1
Available for sale 0.1 0.1
Total equity securities 15.3 4.2
Managed funds
(2)
Held for trading 15.1 7.3
Available for sale 0.1 —
Total managed funds 15.2 7.3
Total equity securities and managed funds 30.5 11.5
Total securities 465.2 317.4
Notes:
(1) These numbers are gross numbers. Impairment allowances of LVL 2.6 million and LVL 7.1 million, respectively, were established at
31 December 2005 and 31 December 2004, respectively.
(2) Managed funds represent the Group’s share in certain portfolios of fixed income securities and/or shares that are managed on behalf of
investors. Investments in managed funds, where the Group does not possess sufficient information on the portfolios’ composition
between fixed income securities and shares, are classified in the accounts as investments in shares and other non-fixed income securities.
36
Fixed income securities identified as ‘‘held for trading’’ in the above table represent the Group’s proprietary
trading portfolio. Fixed income securities indicated as ‘‘available for sale’’ are principally used by the Group to
hedge its liquidity risk in relation to its loan portfolio, see ‘‘Results of operations for the years ended 31 December
2005 and 2004 – Net profit from trading activities’’ above.
Balances Due from Credit Institutions
The Group’s interbank lending was LVL 312.6 million at 31 December 2005 and LVL 312.9 million at
31 December 2004. As a percentage of total assets, interbank lending was 17.0% at 31 December 2005 and 22.0%
at 31 December 2004.
Total Liabilities
As at 31 December 2005, the Group had total liabilities of LVL 1,684.2 million as compared to
LVL 1,298.1 million at 31 December 2004. The increase at the end of 2005 principally reflected increases in
deposits from customers, in interbank borrowing and in securities issued.
Deposits from Customers
As at 31 December 2005, the Group had total deposits from customer of LVL 1,317.9 million as compared to
LVL 1,105.6 million at 31 December 2004. This increase can principally be attributed to marketing campaigns
designed to attract depositors and the competitive pricing offered by the Group. As a percentage of the Group’s
total liabilities, deposits from customers were 78.3% as at 31 December 2005 and 85.2% at 31 December 2004.
Information on the Group’s customer deposits is set out in ‘‘Funding and Liquidity’’ and ‘‘Lending and Selected
Statistical Information’’ below.
Balances due to Credit Institutions and Central Banks
As at 31 December 2005, the Group had liabilities to other banks of LVL 263.0 million as compared to LVL 172.3
million at 31 December 2004. A significant portion of these amounts represents short-term syndicated loans made
to the Bank, see ‘‘Funding and Liquidity’’ below. As a percentage of the Group’s total liabilities, liabilities to
other banks were 15.6% at 31 December 2005 and 13.3% at 31 December 2004.
Issued Debt Securities
As at 31 December 2005, the Bank had debt securities in issue of LVL 74.1 million, see ‘‘Funding and Liquidity’’
below. No debt securities had been issued by it at 31 December 2004. As a percentage of the Group’s total
liabilities, issued debt securities were 4.4% at 31 December 2005.
Memorandum Items
The Group’s memorandum items amounted to LVL 1,186.1 million at 31 December 2005 and principally
comprise foreign exchange contracts, financial commitments, funds under trust management, derivative financial
instruments and contingent liabilities. A breakdown of financial commitments (amounting to LVL 190.8 million
at 31 December 2005) and contingent liabilities (amounting to LVL 21.1 million at the same date) is set out in
note 30 to the Financial Statements. Note 30 to the Financial Statements also presents information on the notional
amounts and fair values of the foreign exchange contracts and derivative financial instruments. Funds under trust
management (principally assets managed by PAM for the Bank and Group’s customers) are described in note 31
to the Financial Statements.
Funding and Liquidity
Introduction
The Group benefits from being one of the most stable financial services groups in the Baltic countries, evidenced
by the fact that it has not recorded a loss in any financial year since it was established. Its reputation helps it to
attract low cost funding from customer deposits.
The Group’s funding base principally consists of customer deposits, which grew from LVL 1,106 million as at
31 December 2004 to LVL 1,318 million as at 31 December 2005. As at 31 December 2005, the Bank had a
19.8% market share of customer deposits in Latvia, according to data prepared by the Association of Latvian
Commercial Banks.
Customer deposits comprised 71.5% of the Group’s total liabilities and shareholders’ equity at 31 December
2005 compared to 77.6% at 31 December 2004. At 31 December 2005, 15.9% of total amounts owed to
37
customers comprised deposits of the Group’s ten largest corporate depositors. The Group’s own equity
contributed 8.6% in total asset funding as at 31 December 2005.
Related party deposits accounted for 3.3% of the Group’s total deposits at 31 December 2005, compared to 2.6%
as at 31 December 2004. The debut issues of public notes in the domestic market and bonds in the international
market accounted for 4.4% of the Group’s total funding at 31 December 2005.
Statistical information on the Group’s customer deposits is set out under ‘‘Lending and Selected Statistical
Information’’ below.
Sources of Funds
The following table shows the Group’s sources of funds as at the dates indicated.
31/12/2005 31/12/2004
Group Group
LVL millions
Balances due to credit institutions 263 172
Deposits from customers 1,318 1,106
Issued debt securities 74 —
Other liabilities 29 20
Total liabilities 1,684 1,298
Shareholders’ equity 158 126
Total liabilities and shareholders’ equity 1,842 1,424
The Bank has entered into financings with credit institutions and central banks including syndicated loans. As at
31 December 2005, loans from credit institutions and central banks to the Bank comprised 14.3% (12.1% at
31 December 2004) of the Group’s total liabilities and shareholders’ equity.
Since 1998, the Bank has entered into eight syndicated loans in the international markets, of which two remain
outstanding. The two outstanding loans were entered into in July 2005, in an amount of EUR 188,500,000, and in
March 2006, in an amount of EUR 200,000,000. The Bank is using these loans to develop its business and to
finance the growth of its loan portfolio.
In March 2005, the Bank completed its first public offering of notes in the domestic market. All the securities
offered were sold and the total volume issued was LVL 5 million. The securities are listed on Riga Stock
Exchange.
In June 2005, the Bank issued its first bonds in the international market. The issue raised EUR 100 million with a
three-year maturity at an interest rate of 4.375%.
Capital Adequacy
FCMC regulations require Latvian banks to maintain a capital adequacy ratio based on financial statements
prepared to Latvian accounting standards at 8% of risk-weighted assets.
Since the Bank has subsidiaries which are financial institutions, it must comply with the regulatory requirements
based on both the Group’s consolidated financial statements and the Bank’s financial statements as a stand-alone
entity. As at 31 December 2005, the Group’s capital adequacy ratio calculated in accordance with the FCMC
requirements was 11.1% (compared with 11.9% at 31 December 2004). At the same time, the Bank’s capital
adequacy ratio without taking into account the Bank’s investments in subsidiaries and calculated in accordance
with the FCMC requirements was 11.7% (compared with 12.5% at 31 December 2004).
As at 31 December 2005, the Group’s capital adequacy ratio calculated according to Basle Committee guidelines
was 11.7% (compared with 12.2% at 31 December 2004) and the Bank’s capital adequacy ratio calculated in the
same manner but without taking into account its investments in subsidiaries was 12.2% (compared with 12.8% at
31 December 2004). The minimum capital adequacy ratio recommended by the Basle Committee guidelines
is 8%.
38
The following table sets out capital adequacy information for the Group calculated according to the Basle
Committee guidelines at the dates indicated:
31 December
2005 2004 2003
LVL millions, except percentages
Tier I Capital 154 121 100
Tier II Capital 8 7 8
Tier I + Tier II Capital 162 129 108
Total Capital charges 111 84 64
Tier I Capital Adequacy Ratio
1
11.1% 11.5% 12.6%
Tier I + Tier II Capital Adequacy Ratio
1
11.7% 12.2% 13.6%
1 Capital/Capital charges * 8%
Risk Management
Credit Risk
Credit risk is the risk that a counterparty may be unwilling or unable to meet its contractual obligations to the
Group, thus causing loss to the Group. The Bank manages the level of credit risk which the Group undertakes by
setting limits for portfolios, individual counterparties or groups of related counterparties as well as country or
other geographical limits. The limits for portfolios are established by the asset and liability committee
(‘‘ALCO’’), which also sets the Bank’s base interest rate, whereas limits for individual counterparties or groups
of related counterparties are set by the risk management committee. The adequacy of all the limits established is
monitored by the Bank’s risk management committee on a weekly basis. Daily monitoring of limit compliance is
undertaken by the Bank’s back office department.
Credit risk management is the overriding principle of the Bank’s lending practice. A brief outline of the Bank’s
lending practice is set out under ‘‘Lending and Selected Statistical Information’’ below.
Asset and Liability Management and Treasury Risk Policies
The Supervisory Board decides upon the asset/liability management policies for the Bank. The treasury
department realises exposure management, while the risk management department monitors adherence to the
policy and risk management principles, in addition to providing ALCO with recommendations and risk analysis.
ALCO is responsible for establishing limits in order to manage liquidity risk, currency risk and interest rate risk.
Interest rate risk
The effective and efficient management of interest rate risk is important to the Group and is monitored by ALCO,
Interest rate risk principally affects the Group’s securities portfolio. In this respect, the Group analyses and seeks
to balance both interest rate ‘‘repricing’’ risk and interest rate ‘‘cash flow’’ risk. Repricing risk is the effect of
interest rate fluctuations on its profit and loss account and revaluation reserve through its trading and available for
sale portfolios, respectively, whilst cash flow risk is the effect on the stability of its net interest income through
reducing the maturity of securities in the portfolio.
The Group’s interest rate exposure is monitored on a daily basis by the Bank’s treasury department and by ALCO
on the basis of monthly reports covering loan duration, gap analysis and interest rate change scenario simulations
to measure interest rate sensitivity. An interest rate repricing analysis of the Group’s assets and liabilities is set
out in note 35 to the Financial Statements.
If interest rates were to rise, the effect on the Group’s net interest income would be positive as approximately
one-half of its assets are funded with non-interest bearing resources. However, the Group would experience a
short-term negative impact on its profitability through marking to market its trading securities portfolio. In the
case of a 1% increase in interest rates, management estimates that the loss incurred on the Group’s trading
securities portfolio would be less than LVL 2 million.
39
Currency risk
The treasury department manages the Group’s exposure to foreign exchange rate fluctuations in accordance with
ALCO limits and, where appropriate, through the use of derivatives as hedging instruments. ALCO determines
the limits for open positions in individual currencies as well as for total open positions. Specific trading limits and
strategies are also set for each responsible foreign exchange dealer or dealer group.
The Bank’s largest total open position limits are as follows:
Currency
Limit
(US$ million)
Capital
requirement
LVL 60 0%
EUR 60 1%
USD 20 8%
GBP 15 8%
RUR 10 8%
Latvian banking legislation requires that open positions in each foreign currency may not exceed 10% of the
Bank’s equity (as calculated in accordance with FCMC regulations on capital adequacy for Tier I and II) and that
the total foreign currency open position may not exceed 20% of equity. Since 1 January 2005, Latvia’s currency
has been pegged to the euro and accordingly there are no limits on the open LVL/EUR position. The Bank is in
compliance with the above requirements.
An analysis of the Group’s exposure to foreign exchange risk is set out in note 36 to the Financial Statements.
Liquidity risk
Liquidity risk relates to the ability of the Group to meet its financial obligations when they fall due without
incurring substantial losses. In order to manage its liquidity gap, the Group evaluates its volatile liabilities and
seeks to ensure that they are matched by liquid assets (typically fixed income securities). Liabilities which are
classified by the Group as volatile are significantly less than its demand deposits, reflecting the fact that many
such deposits are held on a long-term basis. This gap between the Group’s liquid assets and volatile liabilities is
constantly monitored. As at 31 December 2005, the Bank’s liquid assets accounted for 26.6% of its total assets.
The Bank’s treasury department monitors its assets and liabilities and prepares weekly reports for ALCO on the
Group’s liquidity position.
The Group’s own requirements with respect to the classification of its assets and liabilities are more detailed than
those set by the Bank of Latvia, particularly with regard to its securities portfolio and deposits from the public.
The FCMC requires Latvian banks to maintain liquidity of not less than 30%. As at 31 December 2005, the
Bank’s regulatory liquidity ratio was 53.9%.
An analysis of the Group’s assets and liabilities by maturity is set out in note 34 to the Financial Statements.
Asset diversification
The Group follows a policy of diversification of its assets and off-balance positions by nature, country, industry
sector and other risks with a view to managing the risks associated with asset concentration.
40
CAPITALISATION OF THE GROUP
The following table sets out consolidated short-term liabilities, long-term liabilities and shareholders’ equity
which make up the capitalisation and indebtedness of the Group as at 31 December 2004 and 2005, adjusted to
give effect to the issue of the Notes, and is derived from the audited consolidated financial statements of the
Group for the year ended 31 December 2005.
31 December
2005
31 December
2004
(in thousands
of LVL)
(in thousands
of LVL)
Short-term liabilities 1,576,681 1,278,867
Balances due to credit institutions and central banks 256,789 171,690
Deposits from customers 1,294,988 1,089,087
Other liabilities 24,904 18,090
Long-term liabilities 247,689 19,227
Balances due to credit institutions and central banks 6,207 560
Deposits from customers 22,936 16,484
Other liabilities 4,351 2,183
Debt securities issued 74,070 —
The Notes (now being issued) 140,125 —
Shareholders’ equity (excluding minority interest) 158,079 126,374
Paid-in share capital 65,027 65,027
Share premium 12,694 12,694
Reserves 2,358 3,867
Retained earnings 78,000 44,786
Total capitalisation and indebtedness 1,982,449 1,424,468
Notes:
1. Capitalisation and indebtedness does not include minority interests.
2. As at 31 December 2005, the Bank had contingent liabilities of LVL 21,115.
3. As at 31 December 2005, none of the borrowings of the Bank were guaranteed or secured.
4. The Bank’s authorised and issued share capital consists of 65,027,295 ordinary shares with nominal value LVL 1 each. Of these,
60,633,439 have voting rights and 4,393,856 do not have voting rights.
5. Apart from entering into a one-year syndicated loan in March 2006 in an amount of E 200 million and the repayment of a syndicated loan
in an amount of E 69.5 million, there has been no material change in the capitalisation and indebtedness of the Bank since
31 December 2005.
41
DESCRIPTION OF THE GROUP
HISTORY
The Bank was established by its two founder shareholders (see ‘‘Ownership and Capital Structure’’) on
14 May 1992 for an unlimited duration as a joint stock company under Latvian law. Having received its banking
licence, the Bank commenced operations in June 1992. The Bank’s registered number is 40003074590 and its
registered office is located at Smilsˇu Street 3, Riga LV-1522, Latvia, which is also its headquarters. The Bank’s
telephone number is +371 701 0000. As at 31 December 2005, the Bank had a total of 25 consolidated
subsidiaries and one non-consolidated subsidiary that operate in various financial sectors.
Set out below is a description of certain significant dates in the Group’s history:
1992 The Bank was registered on 14 May 1992 as one of the first commercial banks in Latvia.
1995 The Bank survived the Central and Eastern European (‘‘CEE’’) banking crisis which caused the
closure of less stable banks.
1998 The Bank opened a representative office in Frankfurt and established two subsidiaries, a pension
fund subsidiary called AS Parekss atklatais pensiju fonds (‘‘Parex Pension Fund’’) and a customs
brokerage subsidiary called SIA Parex Brokeru Sistema (‘‘Parex Broker System’’).
2000 The Bank completed its acquisition of Industrijos Bankas in Lithuania (now AB Parex Bankas
(‘‘Parex Bankas’’)).
2001 The Bank opened a representative office in Tallinn in Estonia.
2002 The Bank established an asset management subsidiary called AS Parex Asset Management and the
Bank opened a representative office in London.
2003 The Bank established a leasing subsidiary, now known as OU Parex Leasing & Factoring (‘‘Parex
Leasing & Factoring’’), in Estonia and opened representative offices in Stockholm and Tokyo.
2004 The Bank opened its first branch in Estonia and acquired 100% of the shares of AP Anlage und
Privatbank AG (‘‘AP Anlage & Privatbank’’) in Switzerland.
2005 The Bank opened a branch in Berlin in October. In November, AS Parex Asset Management and
another subsidiary were merged to create, IPAS Parex Asset Management (‘‘PAM’’), a unified
investment management company for the Group.
2006 The Group’s PAM Parex Eastern European Balanced Fund, its first fund sold in Western Europe,
was registered for public distribution in Sweden.
The Group has been recognised internationally with awards from various financial publications, including the
international magazine Euromoney, which named the Bank the ‘‘Best Bank in Latvia’’ in 2001, 2002, 2003 and,
most recently, in 2005. Another international magazine, Global Finance, named the Bank the ‘‘Best Foreign
Exchange Bank in Latvia’’ in 2005 and 2006 and the ‘‘Best Bank in Latvia’’ in 2005 for the Bank’s success in the
Emerging Markets banking sector. The Bank was also named the ‘‘Best Bank in Latvia’’ by the Banker Magazine
in 2001, 2002 and 2004.
GROUP’S STRUCTURE
The Group is currently represented in 15 countries through operating subsidiaries or, in certain cases,
representative offices.
The Bank’s head office and three main branches are located in Riga, with regional branches in other Latvian
cities. As at 31 December 2005, the Bank operated a total of 90 branches and customer service centres in Latvia
serving more than 20,000 loan and finance lease customers and nearly 200,000 deposit customers.
The Group has 14 branches and customer service centres covering all the major cities in Lithuania through Parex
Bankas. The Bank also has branches in Tallinn and Berlin and 12 representative offices in 10 countries, as well as
a subsidiary, Parex Group Representation Limited, in London which also acts as a representative office of the
Bank.
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The following chart provides brief information on the Bank’s principal subsidiaries and further information is
contained in note 20 to the Financial Statements.
GENERAL BUSINESS OVERVIEW
Under its banking licence, the Bank is able to offer its retail and corporate customers in Latvia a range of banking
services, including:
r integrated account services, including foreign exchange and local currency demand and term
deposit accounts and wire transfers;
r lending services including mortgages, other loan and overdraft facilities, trade finance and project
finance;
r plastic card services, including debit and credit cards;
r investment banking services, including corporate finance advisory and securities underwriting; and
r capital market services including foreign exchange, equity and fixed income securities brokerage,
margin trading and investment advisory.
The Group also offers banking services in Lithuania (through Parex Bankas) and in Estonia and certain other
countries through its branches, together with asset and pension fund management, leasing (including financial and
operating leases and factoring), and customs brokerage and other services in Latvia and elsewhere through
separate subsidiaries.
Management believes that the Group’s key products from a profitability and growth perspective are mortgage
loans, plastic cards and pension plans. The Group’s mortgage loan portfolio was LVL 345 million at
31 December 2005, 39% of its total loan portfolio at that date. The Group issues plastic cards in Latvia and
Lithuania and, in 2004, concluded a five-year agreement with American Express allowing it the sole right to issue
and distribute American Express credit cards in Latvia. By the end of 2005 and based on data provided by the
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Latvian Central Depositary, PAM’s market share in second tier pension funds management in Latvia (as to
which, see ‘‘Asset Management’’ below) exceeded 25%, further increasing its market leadership position when
compared with the previous year.
STRATEGY
The Group aims to expand its market share to become a leading regional player in the Baltic countries (which it
considers its home market) and to increase its profitability through the following strategies:
1. expanding and diversifying the range of commercial and investment banking products and services offered;
2. expanding and strengthening its pan-Baltic and international presence;
3. expanding its asset management activities; and
4. diversifying and strengthening its funding base.
Each component of the strategy is discussed below:
Expanding and diversifying the range of commercial and investment banking products and services offered
The Group intends to continue to develop new products and to refine and improve the existing core banking
products offered by it in order to address the specific needs of its retail and corporate clients in line with the
increasing sophistication of, and access to, financial markets in the Baltic countries.
In particular, the Group intends to focus on further improving its market position in retail lending and consumer
finance in Latvia and the other Baltic countries through providing improved levels of customer service (see
‘‘Retail Banking’’ below) and a competitive product offering (based on a mix of pricing and quality) and through
targeted marketing efforts. In addition, sales targets and motivation programmes have been introduced both for
branch managers and tellers, focusing on key retail products such as loans, deposits, plastic cards and pension
plans.
In terms of new products, the Group intends to focus on its lending and deposit products and on investment
products in particular. In the lending area, the Group has recently launched a mini-payment mortgage loan (which
offers a longer maturity and therefore smaller monthly payments than has previously been available) and it
intends to offer a new credit card product during Spring 2006 offering competitive usage terms. In relation to
deposits, the Group is focussing on aggressive marketing campaigns highlighting the competitive pricing of its
products as well as on developing innovative products such as deposits where the interest rate is linked to an
underlying asset. In the investment product area, the immediate focus will be on 3rd tier pension plans and on the
development of unit-linked life insurance products, see ‘‘Asset Management’’ below.
In the corporate banking area, the Group intends to change its focus from selling particular products to a more
client-centric approach. In this connection, the Group is integrating its client service and lending functions and
will also introduce performance related remuneration for its corporate client service teams. Whereas previously
the Group had focussed on the profitability of individual products now it intends to focus on particular client
relationships which should result in better service to the client as, for example, it may become possible to offer
individual clients discounted terms on particular products against volume business on other products.
In relation to its investment banking activities, the Group’s strategy is to be a one-stop-shop for the investment
banking needs of its local corporate and institutional customers by capitalising on its investment banking team’s
local knowledge and the wide client base of the Group.
The Group plans to expand its range of value added investment banking services for corporate clients by offering
strategic advice in relation to mergers and acquisitions (‘‘M&A’’), company restructuring and corporate finance.
In this connection it is currently working on a small number of M&A mandates and anticipates involvement in
one or more initial public offerings later in 2006. In addition, the Group intends to increase its volumes in the
regional structured finance, loan syndication, securities underwriting and project finance markets by leveraging
its regional syndication and distribution expertise and offering competitive pricing terms.
Expanding and strengthening its pan-Baltic and international presence
The Group believes that it is well represented in Latvia. Although it believes that its Lithuanian subsidiaries’
branch and customer service centre network provides adequate coverage of the main business centres in that
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country, it plans to add a number of new branches in Lithuania during 2006 as part of its strategy to expand its
market position in retail lending and consumer finance in that country.
In Estonia, where the Group currently only has a single branch in Tallinn, the Group’s strategy is initially to focus
on corporate clients and quality service and its aim is to gain 15% of the corporate customer lending market by
2009. In the immediate future, the Group intends to increase the customer deposit base of the Estonian branch
through focused marketing efforts, attractive pricing and cross-selling where possible with a view to supporting
its lending operations, to launch plastic card operations in Estonia during 2006 and to open a second branch in
Tallinn within the next few years.
Outside the Baltic countries, management believes that potential growth opportunities exist in Eastern and
Western Europe, in Russia and the Ukraine and, accordingly, plans to further reinforce the Group’s presence in
each of those areas. The Group expects that it will initially establish a presence in new geographical markets
through representative offices but that these may evolve into branches and subsidiaries over time. In addition, in
order to capitalise on market opportunities and its knowledge of the CIS markets, during 2005 the Bank acquired
a number of leasing companies operating in CIS countries, see ‘‘International Operations’’, and intends to focus
on growing these businesses.
Expanding its asset management activities
PAM’s strategy is focused on providing asset allocation solutions to local clients of the Group and portfolio
management and advisory services to its international clients seeking exposure to the CEE region. In particular
PAM will focus on seeking to attract new customers from the European Union and on expanding its product and
service range in its CEE markets. PAM has recently established a fund in Sweden (see ‘‘Asset Management’’) and
intends to establish further funds and to target potential clients in Sweden and Germany who are interested in
exposure to the CEE region. In relation to the CEE markets, PAM has recently established asset management
companies in both Russia and the Ukraine and intends to focus on expanding the range of products and services
offered by them and aggressively marketing its products and services to potential clients in these countries.
Diversifying and strengthening its funding base
The Group intends to continue to strengthen its regional funding base by attracting deposits from a wider range of
small, medium and large corporate customers and retail clients through appropriate marketing and by offering
attractive products and terms. In addition, the Group intends to continue to diversify its funding base through
borrowing on the international capital markets by issuing debt securities and borrowing through syndicated bank
facilities, see ‘‘Financial Review – Funding and Liquidity’’.
CORE BUSINESS
Financially, the Group’s income is broadly derived from three major sources: lending, customer service and
securities and foreign exchange trading, see ‘‘Financial Review’’. Although the Bank does not currently prepare
its consolidated accounts by reference to particular business segments, operationally it divides its principal
activities broadly into corporate banking, retail banking, investment banking, asset management and treasury and
brokerage operations (including capital markets services). Management of the Bank estimates that its corporate
banking activities accounted for approximately 33 per cent. of Group’s net operating income in the year ended
31 December 2005 and its retail banking activities accounted for approximately 25 per cent. The balance is
derived from the other activities carried on by the Group. Although currently small in terms of revenue
generation, management regards the Group’s investment banking activities as a strategically important part of the
business with potential for future growth. PAM, the Group’s asset management company, is the largest asset
manager in the Baltic countries and had approximately LVL 585 million in assets under management at
31 December 2005, of which LVL 142 million are the Group’s client’s funds.
Corporate banking
In 2005, the Group’s target corporate client list expanded from the top 300 companies in Latvia to the top 3,000.
Currently, Group companies provide services to nearly 30% of the top 300 Latvian enterprises.
The Group offers its corporate customers a full range of financial services from current and term deposit accounts
to project financing, lending and investment services. The Bank has established a dedicated team serving
corporate clients within its corporate service department, which focuses on Latvian corporate customers having a
monthly turnover on their account, or an account balance, of at least EUR 200,000.
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The Group offers its corporate customers a range of credit products as well as other services including plastic
cards and pension management. Credit products include investment loans, working capital loans (including credit
lines, factoring and overdrafts), leasing facilities, letters of credit and guarantees. Details of the Group’s lending
policies and its loans and advances to customers (including its corporate customers) are set out below under
‘‘Lending and Selected Statistical Information’’.
The Group’s corporate internet banking solution, branded DIGI::FIRMA, was launched in 2003. By the end of
2005, the number of users of this platform exceeded 18,000 (21% more than the number at the end of 2004) and
the number of payment transactions made through it during 2005 was in excess of 760,000 (33% more than in the
previous year).
The Group counts among its corporate customers a number of Latvian governmental institutions, including the
State Treasury and the municipalities of Riga, Daugavpils and Jurmala, with whom it has established long-term
relationships.
The Bank’s private banking department, which is classified as part of the Group’s corporate banking activities,
has offered high net worth customers in Latvia the full range of services offered by a universal bank and asset
management company in a personalised and tailored manner since 2001. There are 13 client service specialists
employed by the private banking department, up from seven at the end of 2004 reflecting a significant increase in
business in this area. During 2005, the amount of clients’ funds serviced by the private banking department grew
by more than 40%.
Retail banking
The Group offers its retail customers a range of services and products, including deposit taking, consumer lending
(including mortgage lending and personal loans), plastic cards and pension products. These services are offered
through the Group’s network of branches and customer service centres in Latvia, Lithuania and elsewhere, see
‘‘Group Structure’’ above. The Group also provides electronic banking services through its internet and telephone
banking platforms and its network of automated telling machines (‘‘ATMs’’).
Following the upgrade of its customer service centres in 2003 and 2004, the Group has started to focus on
increasing its market share in all the major areas of retail business. Sales targets and motivation programmes have
been introduced both for branch managers and tellers, focusing on key retail products such as loans, deposits,
plastic cards and pension plans. During 2005, a separate human resources division was established with a view to
ensuring improved recruitment, training, evaluation and motivation for the sales force, with a view, among other
things, to improving the service provided to customers.
In addition, the Group is continually upgrading its retail online banking platform, branded as Parex Internet Bank,
with a view to expanding the number of active users and improving the functionality. Retail customers may apply
for loans and plastic cards online as well as make deposits and execute trades in investment funds and equities. As
at 31 December 2005, the Group had more than 115,000 active users of its retail internet banking service
(compared with approximately 71,000 at the end of 2004) and processed nearly 560,000 retail transactions in the
year ended 31 December 2005 over that platform (compared with 238,000 in 2004).
The Bank also offers telephone banking, although this is not currently widely used. In November 2005, the Bank
launched an SMS banking product which allows its Latvian retail customers to receive notifications about
selected transactions and their account balances through their mobile telephones.
The Bank has one of the largest ATM networks in Latvia with around 130 ATMs. In 2002, the Bank launched a
joint ATM network together with the Latvian Savings Bank and the Baltic Trust Bank. This network was named
Naudas Punkts 24 (Cash Point 24) and currently comprises more than 350 ATMs in Latvia. In addition, the Bank
had 2,061 point of sale terminals at 31 December 2005.
Plastic cards is perceived as a potential high-growth area for the Group, which issues both debit and credit cards
in Latvia and Lithuania to retail and corporate customers, although operationally they are classified by the Group
as a retail product. In 2005, transactions using plastic cards issued by the Group generated LVL 11.1 million
gross revenue, which was 8.6% of the Group’s total gross revenue. The Group intends to increase plastic card
issuance in Lithuania and to start issuing plastic cards in Estonia during 2006. However, almost all of the plastic
cards issued by the Group to date have been issued by the Bank and, accordingly, the discussion below is limited
to cards issued by the Bank.
46
In 1994, the Bank obtained a VISA and Europay license for the issuance of payment cards and was one of the first
banks in Latvia to start issuing VISA and Eurocard/MasterCard. In 1997, the Bank began to issue Maestro cards.
In 1998, the Bank started issuing VISA Classic virtual cards to enable customers to make payments over the
Internet. In 1999, the Bank began to issue Cirrus cards. Also in 1999, the Bank was the first bank in Latvia to
issue credit cards.
During 2005, more than 140,000 cards were issued in Latvia by the Bank bringing the total issued by it at
31 December 2005 to 560,354 cards. During 2004, the Bank concluded an agreement with American Express
giving it a five-year sole right to issue and distribute American Express credit cards in the Baltic countries. By the
end of 2005, over 14,000 American Express Platinum, Gold and Blue credit cards had been issued by the Bank.
The total amount spent using American Express credit cards issued by the Bank during 2005 exceeded LVL 8
million and the number of merchants accepting American Express cards increased 6 times.
The table below shows the cumulative number of plastic cards by type issued by the Bank in the three years
ended 31 December 2005.
31 December
2005 2004 2003
MasterCard 25,194 23,476 21,382
VISA 39,561 27,130 17,504
Virtual VISA/MC (Internet only) 6,590 4,968 3,702
Maestro 226,681 200,223 170,160
VISA Electron 248,185 162,542 88,387
American Express 14,143 — —
Total number of issued cards 560,354 418,339 301,135
By helping to make plastic cards popular as a convenient instrument of payment for products and services, the
Bank has significantly enlarged the amount spent using plastic cards issued by it. During 2005, this turnover
increased by nearly 35%, exceeding LVL 460 million by the end of the year.
The Bank aims to attract new personal and corporate cardholders through direct marketing to employers. The
Bank is also actively working to educate its customers about the benefit of plastic cards through media and other
promotional campaigns and has established a customer loyalty programme to promote its plastic cards in the
Baltic countries.
Investment banking
The Group’s investment banking activities have to date principally included arranging and participating in
syndicated loans and issues of debt securities for its corporate and institutional customers. The Group intends to
expand these activities to include strategic advice in relation to M&A, company restructuring and other corporate
finance transactions during 2006.
During 2005, the Bank increased its participation in syndicated loans and its management of debt securities issues
for local and regional entities and was involved in more than 28 transactions, with a total amount lent of more
than US$2 billion. Included in these transactions were syndicated loans for Ukrsib (Ukraine) and Alliance
(Kazakhstan) and eurobond issues for the City of Kiev and the Ministry of Finance of Belarus. The total amount
lent by the Bank in syndicated loans was US$39 million as at 31 December 2005 (almost three times the amount
at the end of 2004).
The Group believes that it is well placed to benefit from the investment banking opportunities which it expects to
arise as a result of the anticipated continued strong growth in the economies of the Baltic countries and increasing
business volumes between Western and Eastern European companies, investors and governments. Management
believes that this is an area where the Group has an advantage over its Nordic and German-based competitors
through its existing market share and local knowledge and through the local market experience of its employees.
Asset management
The Group’s asset and pension fund management activities are principally carried on through its subsidiary,
PAM, which provides investment management and advisory services to local and foreign high net worth
individuals, corporations, mutual funds, pension funds, insurance companies, foundations and endowments.
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Management of the Bank believes that PAM is the largest asset management company in the Baltic countries
based on published assets under management with assets under management of approximately LVL 585 million
at 31 December 2005. PAM has asset management subsidiaries in Lithuania, Russia and the Ukraine and employs
more than 60 staff. PAM’s core expertise is in CEE and CIS fixed income debt securities, Baltic and Russian
equities and Baltic real estate and it aims to offer in-house solutions for these regions and asset classes.
PAM also manages most of the Group’s securities portfolio (although the Bank (through its treasury department)
directs and approves investment strategies and asset placements), the investment portfolio of AS Parex
Apdrosinasanas Kompanija (‘‘Parex Insurance Company’’) and the pension plans of Parex open pension fund.
As at 31 December 2005, the total amount of the Group’s securities portfolio managed by PAM was LVL 441
million, including a LVL 29 million equity portfolio. This portfolio comprised 23.9% of the total assets of the
Group and the interest received by the Group on the fixed income portfolio in 2005 amounted to LVL 19.7
million or 15.3% of the Group’s total gross revenue in that year.
The Bank has entered into distribution arrangements with a number of international investment management
companies permitting Group companies to offer products in geographical regions, asset classes and investment
styles not covered by in-house products. Currently PAM distributes the products of Franklin Templeton, Aviva
and the World Investment Opportunities Funds which are registered for public distribution in Latvia, as well as a
range of hedge funds, which it distributes on a private placement basis.
PAM is also responsible for managing seven Riga Stock Exchange listed domestic investment funds. These funds
are also registered for public distribution in Lithuania. In 2004, the assets of these investment funds more than
tripled and, during 2005, increased by 140%. Although there is no independently published industry data, at the
end of 2005, PAM’s estimate of its market share of the investment funds market was 48% (or 89% if money
market funds are excluded). In 2005, the returns on its investment funds ranged from 2.9% to 64.3%. PAM also
manages its in-house hedge fund, Parex Global Opportunities Fund B.V.
Pension fund management remains a major area of potential growth for the Group as management believes that
Latvian pension assets under management will increase by up to 10 times by 2010. Although there is no
independently published industry data, management believes that, at the end of 2005, Parex Pension Fund, the
Bank’s pension fund subsidiary, was the second largest private open pension fund in the country by number of
clients with an estimated market share in this respect in excess of one-third. The Bank’s market share (by number
of customers) in second tier pension funds management increased from 20% in 2004 to 25% at the end of 2005
according to data provided by the Latvian Central Depositary. In Latvia, there are three tiers of pension funds: the
first tier being State pensions funded by a certain percentage of social security contributions, the second tier being
funded by a certain percentage of social security contributions and managed by State or private asset managers
and the third tier being private pensions funded by voluntary contributions. In total, PAM managed more than
LVL 20 million of pension fund savings at 31 December 2005.
The Group’s investment funds and pension funds are distributed through its retail network, its private banking
department and its Swiss subsidiary.
In cooperation with AAS ‘‘Sampo dzviba’’ (‘‘Sampo Life’’), PAM was the first asset management company in
Latvia to offer funds with unit-linked life insurance wrapping. Currently, in Latvia, such funds offer significant
tax advantages to investors. In December 2005, PAM established its own life insurance subsidiary, AS Parex
Dziviba (‘‘Parex Life’’) and this company is expected to be fully licensed and able to offer life insurance
products to the Group’s corporate and retail customers by mid-2006.
Outside of Latvia, PAM currently has asset management subsidiaries operating in Lithuania, the Ukraine and
Russia. The Lithuanian company, which was licensed to commence business in 2004, currently manages one
equity fund, two second tier pension plans and one third tier pension plan. The Ukrainian company was also
licensed in 2004 and currently manages fixed income, balanced and real estate investment funds and a private
pension fund. The Russian subsidiary obtained its license in 2005 and launched fixed income and balanced
investment funds in early 2006.
PAM also offers investment funds to other EU investors, with the first such fund being registered for public
distribution in Sweden in January 2006. The Bank anticipates that it will complete the necessary procedures for
distributing Parex-branded funds in certain other European countries during 2006.
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Treasury and brokerage
The key functions of the treasury department are to manage the Group’s liquidity and to manage its proprietary
foreign exchange (‘‘FX’’) and fixed income securities positions (through PAM in the case of the securities
portfolio). As the Group has a relatively short-term deposit base and a relatively longer-term loan portfolio, in
order to maintain liquidity it also holds a portfolio of highly liquid fixed income securities (which are classified in
its accounts as available for sale securities). In addition to managing these portfolios, the treasury team enters into
FX and interest rate derivative transactions to mitigate certain risks and hedge the Group’s average interest rate
position. As at 31 December 2005, the Bank’s regulatory liquidity ratio was 53.9%, 23.9% more than the FCMC
minimum requirement.
In addition, the treasury department undertakes the trading of fixed income and equity securities, foreign
exchange and other products (including commodity derivatives) as a broker for the Group’s customers. These
activities are effected through PAM and are described briefly below.
Securities brokerage
The Group’s securities brokerage teams offer its customers a broad range of securities brokerage services and
seek to introduce new products and markets to clients on a regular basis. The Group’s capacity to provide these
services is supported by in-house research. The number of brokerage transactions completed in 2005 on behalf of
the Group’s clients was more than 22,800, doubling the corresponding figure from 2004. The gross revenue from
brokerage transactions was LVL 2.2 million in 2005, an increase of 50% from 2004.
According to data supplied by the Riga Stock Exchange, Parex had a 7.5% market share of fixed income turnover,
a 5.4% market share of equities turnover and a 5.4% overall turnover market share in Latvia in 2005.
Foreign exchange trading
In 2005, the Group’s FX desk earned profit from foreign exchange trading and the revaluation of its open
positions of nearly LVL 8.7 million, an increase of 33% against 2004. During 2005, the Group executed over
312,000 FX operations in 35 currencies, with a daily average turnover in excess of LVL 148 million.
In July 2005, the Bank became a participant in the Electronic Broker System, which provides access to on-line
real time prices and liquidity offered by banks. Currently, the main counterparties of the FX desk include local
Baltic banks, certain large European banks and Russian and other CIS banks. The Bank plans to expand its
dealing relationships geographically to smaller banks in Poland, the Czech Republic, the Slovak Republic and
Slovenia.
Commodity derivatives brokerage
The Group provides its customers with 24 hour service in the international derivatives trading markets. The
Group is developing an OTC platform for energy-related derivatives for clients. The trading of commodity
derivatives (including energy, stock indices, currencies and metals) increased substantially during 2005 and the
gross revenue from commissions generated by derivatives trading were LVL 0.4 million, 38% more than the
revenue generated in 2004.
OTHER ACTIVITIES
The Group offers its customers a range of other services, included amongst which are custody services, assistance
in obtaining European Union funding and customs brokerage services.
Custody services
The Group offers investment and pension fund custody administration services as well as securities account
services, securities processing, sub-custodian services for international banks, brokers and funds, and voting
services. The Bank is a custodian bank for a number of large corporate and retail clients across the Baltic and CIS
countries and offers these clients safe-keeping services in respect of their Baltic and other securities.
Certain Group companies are members of the three Baltic central depository systems as well as the delivery
versus payment settlement system of the Depository Clearing Company in Russia.
European Union funds
On 1 May 2004, Latvia became a full member of the EU. One of the challenges faced by Latvia on joining the EU
is to align its economic and social development with that of the existing EU member countries. To help to
49
facilitate integration, Latvia is able to utilise capital allocated from EU funds. The Bank works with clients to
help them to satisfy the necessary eligibility criteria for obtaining EU funding and to provide bridging loans in the
interim period. The Bank’s services connected with these EU funds are therefore closely related to lending
opportunities.
Customs brokerage
Parex Broker System was established in 1998 to provide its customers with a full range of customs brokerage
services. In co-operation with other Group companies, Parex Broker System and its subsidiary in Lithuania
provide customs clearance services, insurance and payment of customs fees services to export, import and transit
freight managers and transporters.
INTERNATIONAL OPERATIONS
Outside Latvia, the Group’s principal operations are in Lithuania, Estonia, Switzerland and certain CIS countries.
The Group has operated in Lithuania since 2000, when the Bank acquired the entity now known as Parex Bankas.
Parex Bankas has 14 branches and customer service centres covering all major cities in Lithuania and is the tenth
largest bank in Lithuania by assets according to data provided by the Bank of Lithuania. In 2003, the Group
introduced leasing services in Lithuania by establishing UAB Parex Lizingas ir Faktoringas (‘‘Parex Lizingas ir
Faktoringas’’). This company enables its customers to acquire various items on leasing terms and conditions,
including real estate, vehicles, work equipment and white goods. As at 31 December 2005, the combined assets of
Parex Bankas and Parex Lizingas ir Faktoringas were LVL 110.0 million.
In Estonia, the Bank opened a representative office in Tallinn in 2001 and, in 2004, opened its first branch in the
country. Parex Leasing & Factoring commenced operations in Estonia in 2003 and has originated loans and
leases since then, ranging from consumer finance to railroad car finance. As at 31 December 2005, the assets of
Parex Leasing & Factoring in Estonia were LVL 16.9 million.
In 2004, the Bank acquired all of the shares of AP Anlage & Privatbank, a loss-making Swiss private bank
located in the Greater Zurich area. This acquisition made Parex the first bank in Latvia to obtain a licence to
operate in the Swiss banking market. AP Anlage & Privatbank positions itself as a traditional Swiss bank focused
on private banking, investment consulting and asset management for clients originating from the Group’s home
markets. In addition, AP Anlage & Privatbank co-operates with PAM to offer a range of financial and equity
products from companies in the Baltic countries and CEE to Swiss institutional and private investors. In 2005, the
number of customers of AP Anlage & Privatbank increased by 164% and its assets under management exceeded
65 million Swiss francs (equivalent to EUR 45 million), and generated 0.6 million Swiss francs (or EUR 0.4
million) of net profit, thus achieving profitability within 18 months following its acquisition.
In the beginning of 2005, the Bank’s Management Board resolved to expand the Group’s lending operations in a
number of CIS countries. During the first half of 2005, the Bank acquired a number of leasing companies, which
provide mainly car leasing services, in CIS countries. These companies are based in Moscow and St. Petersburg
(Russia), Kiev (Ukraine), Minsk (Belarus) and Baku (Azerbaijan). The Bank is also currently analysing the
Uzbek market to determine the potential for establishing a leasing operation there.
The Group’s representative offices do not engage in commercial activity. Their principal activity is marketing
and providing information regarding the services offered by companies within the Group, investment
opportunities in Latvia, the other Baltic countries and other countries in which Group companies operate. The
Group has 12 representative offices in 10 countries: Frankfurt am Main (Germany), Stockholm (Sweden), Tokyo
(Japan), Moscow and St. Petersburg (Russia), Kiev and Dnepropetrovsk (Ukraine), Minsk (Belarus), Almaty
(Kazakhstan), Chisinau (Moldova), Baku (Azerbaijan) and Tashkent (Uzbekistan). The Bank also has a
subsidiary in London that acts as a representative office with a full time representative covering London-based
banking relationships.
COMPETITION
Because approximately 90% of the Group’s income originates from its Latvian customers and approximately
90% of its assets are in Latvia, the competition that most significantly affects the Group is that which it faces in
Latvia.
As at 31 December 2005, there were 22 domestic banks in Latvia, one branch of a foreign bank and five
representative offices of foreign banks. Based on data provided by the Association of Latvian Banks, the Latvian
banking sector made an aggregate LVL 193 million profit in 2005, a 66% increase from 2004 when the figure was
50
LVL 116 million. The total assets of the banking sector were LVL 10,943 million at 31 December 2005. There
has been significant growth in the Latvian banking sector in recent years (see, for example, the second table
below) and, given that market penetration of a range of banking services remains below EU averages,
management of the Bank believes that this growth is likely to continue, at least in the near future.
The Latvian banking sector has been largely privatised with only 6.6% of capital remaining in government
ownership. More than 50% of the non-government controlled capital is foreign-owned.
The following table shows certain financial data for the five largest Latvian banks in terms of assets as at
31 December 2005.
Bank Assets Deposits Loans ROA
(1)
ROE
(2)
LVL ’000s % LVL ’000s % LVL ’000s % % %
Hansabanka 2,235,391 20.4 1,196,283 19.3 1,707,954 24.5 2.38 28.83
SEB Latvijas Unibanka 1,898,768 17.4 822,255 13.3 1,573,787 22.6 2.66 34.30
The Bank 1,784,785 16.3 1,227,171 19.8 831,375 11.9 1.68 18.70
AS NORD/LB Latvija 743,510 6.8 180,839 2.9 632,420 9.1 1.11 12.59
AS Rietumu Banka 705,310 6.4 592,992 9.6 249,421 3.6 3.64 45.18
Notes:
(1) Return on assets
(2) Return on equity
Source: The Association of Latvian Commercial Banks (unaudited). The calculation methods used by this entity differ from those used in the
Bank’s financial statements.
Although there are still a relatively large number of banks in Latvia, there is significant concentration as the three
largest banks in terms of assets, AS Hansabanka (‘‘Hansabanka’’), AS SEB Latvijas Unibanka (‘‘SEB Latvijas
Unibanka’’) and the Bank, account for more than 50% of the total banking sector’s assets. The Bank faces its
most significant competition from Hansabanka and SEB Latvijas Unibanka.
The table below illustrates the growth in assets of the five largest Latvian banks by assets for the three years
ended 31 December 2005.
31 December
2003 2004 2005 CAGR
(1)
LVL ’000s %
The Bank 1,052,495 1,398,622 1,784,785 19.25
Hansabanka 949,641 1,296,605 2,235,391 33.02
SEB Latvijas Unibanka 880,685 1,162,850 1,898,768 29.19
AS NORD/LB Latvija 218,310 386,193 743,510 50.45
AS Rietumu Banka 455,953 594,611 705,310 15.65
Note:
(1) Compound annual growth rate
Source: The Association of Latvian Commercial Banks (unaudited). The calculation methods used by this entity differ from those used in the
Bank’s financial statements.
The Group also experiences competition in relation to its investment banking, asset management and securities
brokerage businesses. In investment banking, the competitors are principally AS Suprema Securities (a brokerage,
asset management and corporate finance advisory company) and IBS Prudentia (an investment banking and
financial advisory firm), as none of the other major Latvian banks are very active in the field. In asset
management, the principal competitors are Hansabanka and SEB Latvijas Unibanka whilst in securities
brokerage the main competitors are Hansabanka, AS Suprema Securities and SEB Latvijas Unibanka.
The Group believes that its principal competitive strengths include:
r its respected pan-Baltic brand;
r its ability to export domestically proven strategies to nearby markets;
r its ability to attract and retain deposits from its customers, evidenced by the fact that at 31 December 2005
it retained the leading market share of customer deposits in Latvia;
51
r its prudent lending policy and risk management procedures reflected in the fact that the Group has
managed to retain high asset quality at a time of significant expansion in its loan portfolio;
r its expertise in the Baltic and CIS asset management markets;
r its ability to attract and motivate high-level professional staff evidenced by low turnover rates in senior
management positions;
r its proven management track record, with a compound annual growth rate in profit before tax since 1998
in excess of 50%; and
r its strong asset quality and capital base, with a Group capital adequacy ratio of 11.7% at 31 December
2005 (3.7% above the level required by Basle Committee guidelines).
COMPLIANCE
Anti-money laundering legislation has been in force in Latvia since 1998 and the Bank’s anti-money laundering
procedures are described below. Similar legislation is in place in other countries in which the Group operates and
similar procedures, tailored where applicable to the relevant market are followed by the relevant Group
companies. To comply with the Latvian legislation, the Bank has strict know-your-customer (‘‘KYC’’)
procedures which are used when new accounts are opened and are also applied to all existing clients. Accounts
are also monitored daily, with suspicious activity reported to the Office of the Prosecutor by the Bank’s
compliance department.
The Bank’s anti-money laundering procedures are reviewed and revised annually by its compliance department.
The policies include client identification and KYC, monitoring of client transactions, reporting of unusual and
suspicious transactions, client acceptance and termination as well as training of the Bank’s employees. There are
no specific differences in the procedures applied to Latvian residents and non-residents although clients who
complete applications to open accounts in representative offices are subject to review and approval by the Bank’s
client monitoring department.
All clients are required to provide identification information and relevant originals or certified copies of
identification documents. In addition, all clients are required to fill out a questionnaire containing detailed
questions on their background, sources of income, volumes of planned transactions as well as other information.
If the information provided in the questionnaire indicates that a customer should be classified as a high risk
customer, copies of additional documents (such as invoices, contracts and proof of sources of funds) are required.
Depending on the client category, an additional background search may be conducted. In certain cases a decision
on client acceptance is referred to the client monitoring department or the Management Board.
According to an independent third-party audit performed by Deloitte & Touche LLP in 2005, the Bank’s
anti-money laundering and combating terrorist financing procedures are in compliance with:
r applicable Latvian law;
r Latvian FCMC guidelines;
r FATF 40+9 recommendations;
r the best practices discussed in the Basel and Wolfsberg AML papers; and
r the U.S. Patriot Act and other anti-money laundering and combating terrorist financing regulations.
LEGAL PROCEEDINGS
The Group is involved in legal proceedings, both as a claimant and as a defendant, in the ordinary course of its
banking business. The Group is not currently involved in any such proceedings which could have a significant
adverse affect on its financial position.
INFORMATION TECHNOLOGY
The Group’s systems, including the GLOBUS programme (Temenos, United Kingdom), CORTEX card system
(Nomad Software, United Kingdom) and the platform for the TWISTER remote customer service system
(DataDesign AG, Germany), are constantly monitored and updated where necessary to ensure that a secure and
52
high quality service can be provided and that the systems afford the opportunity to develop and introduce new
banking services.
The Group’s security policy in relation to its information technology (‘‘IT’’) systems is in compliance with
FCMC requirements as well as best practices of Cobit and ISO 17799. In particular, the Group has in place
CheckPoint Firewall VPN-1 and ISS RealSecure 6.0 Network Sensor software and its internet server is placed in
a separate DMZ network to protect its internet banking service from viruses and hackers. The Group also uses
Firewall software and Cisco routers access lists to protect its ATM network.
In 2004, the Group initiated an IT infrastructure library (‘‘ITIL’’) implementation project in order to re-organise
its IT structure. As part of this project, information systems and resources are regularly evaluated using external
ITIL consultants to increase their effectiveness and efficiency as well as to ensure the security of the Group’s
information technology and information management systems.
RELATED PARTIES
Related parties are defined as shareholders who have significant influence over the Group, members of the
Council and Board of Directors, key management personnel, their close relatives and companies in which they
have a controlling interest as well as associated companies of the Group. The following table shows the
outstanding balances and terms of the Group’s transactions with related parties.
Amount at Average Amount at Average
31 December
2005
rate in
2005
31 December
2004
rate in
2004
(LVL millions) (LVL millions)
Credit exposure to related parties:
Loans and advances 25.2 2.4% 14.6 1.4%
Financial commitments and outstanding guarantees 3.4 — 2.7 —
Total credit exposure to related parties 28.6 17.3
Total deposits from related parties 43.6 19.5% 28.8 20.7%
The majority of the deposits made by related parties have been placed with the Group at rates significantly below
the market interest rates at the time of their placement.
In the ordinary course of business, AS Parex apdrosˇina¯sˇanas kompa¯nija, a related party to the Bank, insures
certain collateral given to the Bank for loans and advances made by it to its customers. This company was sold to
a third party in early 2006.
OWNERSHIP AND CAPITAL STRUCTURE
As at 31 December 2005, the authorised share capital of the Bank was LVL 65,027,295 divided into 60,633,439
ordinary voting shares and 4,393,856 ordinary non voting shares with a nominal value of LVL 1 each. All of the
authorised shares are issued and fully paid up.
Currently the Bank has 63 shareholders. The main shareholders of the Bank are Mr. Valery Kargin and Mr. Viktor
Krasovitsky, both Latvian citizens (each holding 42.89% of its shares). Most of the remaining shares are owned
by institutional investors.
The following table shows the Bank’s current shareholder structure:
Shareholders
Number of
shares owned
% of total
shares
Valery Kargin 27,887,498 42.89%
Viktor Krasovitsky 27,887,498 42.89%
East Capital Asset Management Aktiebolag 2,711,000 4.17%
Danske Capital Finland OY 1,783,061 2.74%
Julius Baer International Equity Fund (Julius Baer Investment Management LLC) 1,427,861 2.20%
Firebird funds 1,182,985 1.82%
Svenska Handelsbanken AB 200,000 0.31%
Other institutional 1,176,855 1.81%
Other private 770,537 1.17%
Total 65,027,295 100.00%
53
CORPORATE GOVERNANCE
Management has structured the Bank’s operations into functional divisions, which are headed by vice presidents
and members of the Management Board.
There are five members of the Council, seven members of the Management Board and six members of the
Council of Directors. The business address of each member of the Council, Management Board and Council of
Directors is 3 Smilsˇu Street, Riga LV-1522, Latvia.
The Council is the supervisory institution of the Bank and its principal function is to monitor the compliance of
the Bank and other Group companies with applicable law and regulation and to ensure appropriate standards of
ethical conduct are observed. Accordingly, as part of this role, it monitors all interaction between the internal
audit department and the Management Board. It also supervises the activities of the Management Board. The
Council elects and dismisses members of the Management Board and ensures that the Bank’s business is
conducted in accordance with applicable law.
The Management Board manages and represents the Bank and its main function is to supervise and manage the
affairs of the Bank. The Management Board is responsible for the commercial activities of the Bank, as well as
for accounting, in compliance with applicable law, the Bank’s articles of association and decisions passed at
shareholder meetings.
The Council of Directors comprises members elected by the Management Board. The Council of Directors is
responsible for coordinating the various business units of the Bank and also performs an advisory role.
The main shareholders of the Bank are not involved in day-to-day management of the Bank and instead focus on
strategic development and developing high-level client contacts and representation. The main shareholders are
represented in the Management Board to ensure protection of their interests and an up-to-date knowledge of the
business. The main shareholders do not have any right to decide on credit exposures or pricing of services and
their influence in the Management Board is limited as they form only two of its seven members.
MANAGEMENT
The current management of the Bank is as follows:
Council
Guntars Grinbergs, Chairman of the Council
Andris Berzins, Deputy Chairman of the Council and former Prime Minister of Latvia
Karina Petersone, Member of the Council and former Latvian government minister
Hans Eberhard Berndt, Member of the Council and foreign banking expert
Gints Poiss, Member of the Council
Management Board
Valery Kargin, Chairman of the Management Board
Viktor Krasovitsky, Deputy Chairman of the Management Board
Vladislav Skrebelis, Member of the Management Board
Alexander Kvasov, Member of the Management Board
Arnis Lagzdins, Member of the Management Board
Janis Skrastins, Member of the Management Board
Gene Zolotarev, Member of the Management Board
54
Council of Directors
Viktor Krasovitsky, Chairman of the Council of Directors
Alexander Kvasov, Senior Vice President (Customer Service)
Eriks Brivmanis, Vice President (Finance and IT)
Liga Purina, Vice President (Lending)
Gene Zolotarev, Senior Vice President (Capital Markets and Investment Banking)
Arnis Lagzdins, Senior Vice President (Compliance)
The business address for Bank’s management is Smilsˇu Street 3, Riga LV-1522. No member of the Council, the
Management Board or the Council of Directors has any actual or potential conflict of interest between his duties
to the Bank and his private interests and/or other duties.
Brief biographies of the executive management of the Bank
President of the Bank
Chairman of
the Management Board
Valery Kargin
Mr Kargin is one of the two founders of the Bank. He is the Chairman of the
Management Board and has held this position since 1992. He holds a degree in
Journalism from the Latvian State University.
Chairman of the Council
of Directors
Deputy Chairman of
the Management Board
Viktor Krasovitsky
Mr Krasovitsky is one of the two founders of the Bank. He was appointed Vice
President of the Bank in 1992 and is currently Chairman of the Council of Directors
and Deputy Chairman of the Management Board. Before founding the Bank, he
was Head of Computer Technology at a state-owned company and a senior advisor
to the Latvian Chamber of Commerce. He holds a degree in science from Riga
Polytechnic Institute.
Senior Vice President
Member of the
Management Board
Arnis Lagzdins
Mr Lagzdins joined the Bank in April 2004 as its Head of Compliance. He
previously held the position of senior advisor to the Executive Director with The
World Bank Group, Washington DC, USA, where he started in 1991. He holds an
economics degree from the Latvian State University and is continuing his doctoral
studies in finance and credit there.
Senior Vice President
Member of the
Management Board
Alexander Kvasov
Mr Kvasov joined the Bank in 1993 as Head of Internal Audit, became a Vice
President in 1998 and is currently responsible for the Operations Division, which
covers services (retail and corporate), card operations and branch management. He
previously held the position of Chief Accountant at the Latvian Trade Bank. He
holds science and economics degrees from Riga Polytechnic Institute and Riga
Aviation University, respectively.
Senior Vice President
Member of the
Management Board
Gene Zolotarev
Mr Zolotarev joined the Bank in 1998 as Vice President responsible for Capital
Markets, Trading & Treasury, Investment Banking, Corporate Finance, Investment
Products and Trust and Asset Management. He is also responsible for managing the
Group’s strategic development covering investor relations, debt and equity
financing and relationships with international financial institutions. He holds the
positions of Member of the Council of PAM and Chairman of the Council of AP
Anlage & Privatbank AG. He was the Chief Operations Officer for Republic
National Bank of New York, Moscow between 1996 and 1998. He started his own
company in 1991 and then joined Coopers & Lybrand, Moscow in 1993. From
55
1989 to 1991 he worked as a management consultant at Andersen Consulting. He
graduated from Columbia University, New York and attended Stern School of
Business, New York University.
Vice President Liga Purina
Ms Purina was appointed Vice President of Lending and Leasing in 2000. She is
responsible for lending operations, covering all lending, credit and leasing facilities
to retail and corporate clients. Between 1997 and 2000 she worked at the London
office of Arthur Andersen as a project manager in the Corporate Finance Division.
She was Head of Internal Audit for the Bank between 1994 and 1997. She
previously held the positions of Chief Accountant in a joint Latvian-Swedish
enterprise and Auditor and Business Consultant with Arthur Andersen. She holds a
degree in finance from the Latvian State University and is a member of the Latvian
Association of Sworn Auditors.
Vice President Eriks Brivmanis
Mr Brivmanis joined the Bank in 1996 as the Deputy Head of the internal audit
department and became Vice President in 1999. He is responsible for the Bank’s
and the Group’s Financial Management, Asset and Liability Management,
Information Technology Strategic Development and Implementation and the
Bank’s and the Group’s accounting systems. He previously worked as an
accountant with Arthur Andersen for four years and held the positions of
Economist and Chief Economist in a few companies. He holds an economics
degree from the Latvian State University.
Employees
During 2005, the Group’s average number of employees was 2,438. As at 31 March 2006, the Group had
2,852 employees.
56
LENDING AND SELECTED STATISTICAL INFORMATION
LENDING
In terms of gross revenue generated, lending is the Group’s most significant business activity. In 2005, gross
revenue from lending generated LVL 54.5 million, or 42.2% of the Group’s total gross revenues in that year, a
44.3% increase compared to the LVL 37.8 million gross revenues generated in 2004.
The Group’s loan portfolio (which, in addition to standard loans, includes utilised credit lines and overdrafts,
loans under reverse repurchase agreements, finance leases, factoring and plastic card credit balances) grew by
27% from LVL 692 million as at 31 December 2004 to LVL 879 million as at 31 December 2005. Within this, the
Group’s mortgage loan portfolio grew by 53.3% to LVL 345 million in 2005. The total loan portfolio grew at a
compound average rate of 27% in the period between 2001 and 2005, and is expected to continue to grow at
around 20-25% in the near future as the GDP of the Baltic countries continues to expand and because the
proportion of total loans and leases to GDP in the Baltic countries is still low compared to Western countries.
The Group principally makes loans to customers in Latvia, Lithuania and Estonia.
LEASING
The Bank’s banking licence permits it to provide financial leasing services only. In order to expand its activities
in the leasing field, the Bank established a leasing company in Latvia to offer both operating and financial leases
to its clients. In August 2005, the leasing company was renamed SIA Parex Express Kredits (‘‘Parex Express
Credit’’) with a view to it also offering its customers hire purchase and other consumer financing contracts. Parex
Express Credit retained the legacy leasing portfolio, which, at 31 December 2005, amounted to LVL 8 million. At
the same time that Parex Express Credit was renamed, the Bank established a new leasing company in Latvia
(‘‘Parex Leasing & Factoring Latvia’’) with a view to providing car, truck and industrial equipment leases as
well as the finance of travel and medical costs among other products. The goal for Parex Leasing & Factoring
Latvia in 2006 is to gain a 10% market share in financial and operating leases for cars, trucks and industrial
equipment in Latvia.
The Bank has provided leasing facilities in Estonia and Lithuania since 2003 and has also recently acquired a
number of leasing companies in CIS countries, see ‘‘Description of the Group – International Operations’’.
CREDIT POLICIES AND PROCEDURES
A brief outline of the Bank’s credit approval, collateral and credit monitoring policies and procedures is set out
below. Loans and advances made by the Bank accounted for approximately 88% of all loans and advances made
by the Group in 2005. Except where indicated, other Group companies follow a broadly similar approach,
tailored to their respective markets.
Credit approval
The Bank’s credit analysis teams analyse all material loan applications. The analysis of potential borrowers
identifies key risks and ways to manage them. The results of each analysis are presented to the Bank’s Credit
Committee as part of the lending approval process. The Bank has a tiered hierarchy of delegated approval
authorities as described below. The ultimate approval body is the Management Board.
The internal risk pricing of corporate loans is based on the creditworthiness of the borrowers and the credit rating
assigned by the Bank to the loan. The Bank uses a financial statements-based internal scoring model for assessing
and monitoring all its corporate borrowers. These ratings are reviewed on a quarterly basis. In cases where the
rating deviates from certain defined benchmarks, a more in-depth analysis of the borrower is performed. In
addition, the Bank performs regular reviews of its existing borrowers in order to detect early signals of loan
quality deterioration and to take appropriate action.
The Bank’s loan supervision department monitors problem loans and, where appropriate, can refer them to the
legal department for enforcement action to be taken.
The FCMC has strict regulations which limit credit exposure to individual clients to less than 25% of the Bank’s
equity and its total credit exposure to related parties, other than consolidated subsidiaries, to less than 15% of the
Bank’s equity. The FCMC requires regular reports on the Bank’s credit portfolio.
57
The following table sets forth the approval authority of the Bank’s Credit Committee and authorised lending
officers when making decisions on loans to clients.
Approval authority Approval limit
Management Board (which may review Credit
Committee decisions) None, except exposure limits set by FCMC
Credit Committee None, except exposure limits set by FCMC
Vice President of Lending LVL 200,000
Head of Corporate Lending and Leasing LVL 200,000
Head of Private and SME Lending and Leasing LVL 200,000
Head of CIS countries Lending development LVL 200,000
Head of Regional Lending and Leasing LVL 80,000
Branch managers with credit approval authority Up to LVL 120,000
Branch managers have different approval limits based on their experience and the size of their branch. When
approving new loans, the total exposure to a client or client group is taken into account and not just the amount of
the loan concerned.
Guideline interest rates and commissions in all loan categories are approved by the credit committee based on the
base rates established by ALCO. Interest and commission rates for individual loans are set at or above the
guideline rates. Only the credit committee and management board (which is empowered to review and revise
credit committee decisions) are authorised to approve loan terms that differ from the interest rate and commission
guidelines established by the credit committee.
Collateral policy
The Bank’s standard practice is to require collateral before granting a loan. Exceptions to this practice include
loans to governments or municipalities in the Baltic countries or loans guaranteed by such entities, intra Group
loans, corporate overdrafts not exceeding 30% of the client’s monthly turnover and consumer loans through debit
balances on credit cards or made by Parex Express Credit. The collateral taken by the Bank includes first
mortgages on real estate and transport vehicles (such as ships or railway carriages), subject to satisfactory
appraisal by independent appraisers. For short-term loans used for working capital finance, a corporate
borrower’s inventory or receivables may be accepted as security, subject to satisfactory appraisal by Group
employees. In this case, personal shareholder guarantees may also be required.
When evaluating the collateral proposed for a loan, the Bank considers loan to value ratios, the liquidity of the
collateral and whether there are any particular legal issues that may impact enforcement of the collateral, such as
registration requirements.
Credit monitoring
The Bank has established detailed procedures for monitoring its credit exposures. These procedures aim to:
r ensure compliance with the terms and conditions of the credit approval;
r review performance of the borrowers against any projections given; and
r detect early warning signals and take appropriate corrective actions.
The Bank requires its corporate borrowers to submit quarterly financial statements and these are analysed by the
Bank’s credit analysts. The Bank may also make on-site inspections of its borrowers where this is considered
appropriate.
If the financial statement analysis indicates that a borrower’s financial situation is deteriorating or the forecasted
performance has not been achieved, a more detailed examination of the borrower’s financial standing is carried
out, assessing the reasons for the deteriorating performance and analysing the borrower’s business and potential
future development. In addition, the Bank may perform stock inspections and stock audits on a regular basis. If an
examination indicates that the loan repayment is at risk, a decision is taken regarding the transfer of the loan to
the loan supervision department or the legal department for enforcement by the legal department.
The Bank’s internal audit department provides an independent assessment of the credit quality of the borrowers
and the Bank’s credit management processes.
58
LOAN LOSS PROVISIONS
The Bank uses the following risk categories in order to establish the allowance specified below for impairment in
accordance with FCMC regulations:
r Standard 0%
r Watchlist 10%
r Substandard 30%
r Doubtful 60%
r Lost 100%
Watchlist loans are loans where:
r business conditions have changed and may negatively impact the borrower;
r there are signs of increased risk in respect of the borrower’s financial position; and
r the interest or principal payment is overdue by up to 30 days.
Substandard loans are loans where:
r the borrower’s cash flows are not sufficient to make regular loan payments; and
r the interest or principal payment is overdue by between 31 and 90 days.
Doubtful loans are loans where:
r the borrower is experiencing liquidity problems; and
r interest or principal payments are overdue by between 91 and 180 days.
Lost loans are loans where:
r interest and/or principal is overdue for more than 180 days; and
r the borrower is insolvent.
In all cases, when a decision is taken on the level of allowance to be established, the value of collateral is also
taken into account. If the collateral has a current market value, can be quickly sold in a liquid market and there
are no legal difficulties in selling the collateral, the allowance for impairment is decreased by the net realisable
value of the collateral.
The Bank considers both specific and general risks in determining its allowance for impairment, see ‘‘Financial
Review’’.
Once it has been determined that a loan cannot be recovered, the credit committee decides when to write-off the
loan and charge it against the allowance for impairment. It is the Bank’s policy to provide 100% for lost loans but
not to write them off until all necessary legal procedures are completed and the amount of the loss is finally
determined.
59
The following table shows the Group’s loan portfolio by credit risk category at the dates indicated.
31/12/2005
Group
31/12/2004
Group
LVL 000’s
Standard 878,716 684,593
Watchlist 5,445 12,261
Substandard 1,934 2,844
Doubtful 2,006 5,232
Lost 7,757 9,657
Total gross loans and advances to customers 895,858 714,587
Less impairment allowance (16,596) (22,894)
Total net loans and advances to customers 879,262 691,693
LOAN PORTFOLIO
Introduction
The following table shows the Group’s gross loan portfolio by product groups at the dates indicated.
31/12/2005 31/12/2004
Group Group
LVL 000’s
Regular loans 521,749 437,541
Utilised credit lines 192,493 130,818
Loans under reverse repurchase agreements 29,777 22,862
Total gross loans to customers 744,019 591,221
Finance leases 53,831 46,338
Factoring 29,952 44,237
Debit balances on settlement cards 21,912 13,876
Due from investment and brokerage firms 19,328 11,951
Overdraft facilities 26,816 6,964
Total other loans and advances 151,839 123,366
Total gross loans and advances to customers 895,858 714,587
Less impairment allowance (16,596) (22,894)
Total net loans and advances to customers 879,262 691,693
Financing is provided by the Group for a range of different purposes, although the majority of its corporate loans
have been made to entities within the transportation and real estate management industries and have a maturity of
between 5 and 7 years. The majority of the Group’s corporate loans have been granted to private companies,
followed by corporate loans to municipalities and state owned enterprises.
Consumer lending relates primarily to mortgages, car loans, student loans and other loans to finance the purchase
of consumer products.
60
The following table shows the Group’s loan portfolio by customer profile as at the dates indicated.
31/12/2005
% of total
gross
loans and
advances 31/12/2004
% of total
gross
loans and
advances
Group Group
LVL 000’s LVL 000’s
Government 1,542 0.2 — —
Local municipalities 4,683 0.5 5,145 0.7
State owned enterprises 13,260 1.5 23,431 3.3
Municipality owned enterprises 18,878 2.1 29,029 4.1
Privately held companies 558,298 62.3 451,845 63.2
Total gross loans and advances to corporate
customers 596,661 66.6 509,450 71.3
Public and religious institutions 14,073 1.6 14,562 2.0
Private individuals 285,124 31.8 190,575 26.7
Total gross loans and advances to customers 895,858 100.0 714,587 100.0
Less impairment allowance (16,596) — (22,894) —
Total net loans and advances to customers 879,262 — 691,693 —
The Group’s net loan portfolio grew by 27% in 2005, from LVL 692 million as at 31 December 2004 to
LVL 879 million as at 31 December 2005. As at 31 December 2005, according to the Association of Latvian
Commercial Banks, the Bank had a 11.9% market share of loans made by Latvian banks. The majority of the
Group’s credit exposure was to the private sector, consisting of corporate loans (67%), retail loans (32%) and
public and religious institutions (1%).
Loans by lender
The Group’s loan portfolio comprises loans and advances made by the Bank and Parex Express Credit in Latvia,
Parex Bankas and Parex Faktoringas ir Lizingas in Lithuania, Parex Leasing & Factoring in Estonia and the
leasing subsidiaries in the CIS countries. The following table shows the division of these loans as at the dates
indicated.
31/12/2005 31/12/2004
Group Group
LVL 000’s
The Bank 789,215 623,181
Parex Express Credit 7,642 6,455
Other 16 16
Total loans and advances made in Latvia 796,873 629,652
Parex bankas 57,427 50,922
Parex Faktoringas ir Lizingas 11,499 11,086
Total loans and advances made in Lithuania 68,926 62,008
Parex Leasing and Factoring 16,746 22,927
Total loans and advances made in Estonia (through subsidiary) 16,746 22,927
Total loans and advances made in CIS countries 13,313 —
Total gross loans and advances to customers 895,858 714,587
Less impairment allowance (16,596) (22,894)
Total net loans and advances to customers 879,262 691,693
As at 31 December 2005, loans and advances made by the Bank accounted for 88.1% of the Group’s loan
portfolio (compared with 87.2% at 31 December 2004). Parex Bankas in Lithuania had the second largest loan
portfolio (6.4%) followed by Parex Leasing & Factoring in Estonia (1.9%).
The increase in the Bank’s loan portfolio was achieved by lending to industries where the Bank has a competitive
advantage through its detailed knowledge of the relevant industry, principally the sea and railway transport
industries, and to market segments which experienced significant growth during the year, principally mortgage
lending and real estate development and management.
61
Largest loans
As at 31 December 2005, the ten largest credit exposures represented 22% of the Group’s total gross loan
portfolio, compared to 23% as at 31 December 2004. Related party loans represented 3% of the Group’s total
gross loan portfolio compared to 8.4% at 31 December 2004.
The following table shows the Group’s 10 largest credit exposures by industry type as at 31 December 2005.
31/12/2005
Group
LVL 000’s
Oil and gas 29,894
Gas supply 29,541
Public transportation 25,164
Terminal 21,084
Sea transportation/Real estate 19,270
Aviation/Sea transportation 17,836
Sea transportation 16,141
Trade/Aviation 14,134
Trade 12,927
Public organisation 12,922
Total 10 largest credit exposures 198,913
Loans by maturity
The following table shows the Group’s outstanding loans and advances to customers by maturity as at the dates
indicated.
31/12/2005 31/12/2004
Group Group
LVL 000’s
Overdue 9,752 9,812
Falling due within:
1 month 76,001 36,704
1 – 3 months 33,180 27,364
3 – 6 months 23,187 28,850
6 – 12 months 69,394 29,021
1 – 5 years 312,817 251,821
more than 5 years 371,527 331,015
Total gross loans and advances to customers 895,858 714,587
Less impairment allowance (16,596) (22,894)
Total net loans and advances to customers 879,262 691,693
As at 31 December 2005, loans with a maturity of one year or less accounted for 24% of the Group’s gross loan
portfolio, loans with a maturity of between one and five years accounted for 35% of the Group’s gross loan
portfolio and loans with a maturity over five years accounted for 41% of the Group’s gross loan portfolio.
62
Loans by customer sector
The following table shows the Group’s gross corporate loans and advances by industry type as at the dates
indicated.
31/12/2005 31/12/2004
Group Group
LVL 000’s
Transport and communications 176,034 174,312
Real estate management 113,802 75,896
Trade 78,846 56,173
Manufacturing 55,985 45,160
Financial intermediation 43,752 42,038
Electricity, gas and water supply 42,930 35,900
Construction 27,725 29,780
Hotels, restaurants and entertainment 21,822 15,030
Agriculture and forestry 2,323 4,349
Other industries 33,442 30,812
Total gross loans and advances to corporate customers 596,661 509,450
The following table shows the Group’s loans and advances by geographical profile of the borrower as at the dates
indicated.
31/12/2005 31/12/2004
Group Group
LVL 000’s
Non-Latvian OECD region residents 108,594 89,183
Latvian residents 510,945 416,987
Non-OECD region residents 276,319 208,417
Total gross loans and advances to customers 895,858 714,587
Less impairment allowance (16,596) (22,894)
Total net loans and advances to customers 879,262 691,693
Loans by currency
The following table shows the currency profile of the Group’s net loans and advances as at the dates indicated.
31/12/2005 31/12/2004
Group Group
LVL 000’s
EUR 379,435 180,731
USD 337,818 347,028
LVL 115,479 125,461
Other 46,530 38,473
Total net loans and advances to customers 879,262 691,693
Approximately 43% of the Group’s net loan portfolio consists of euro denominated loans. The proportion of
US dollar denominated loans has significantly decreased in the Group’s loan portfolio (from 50% at
31 December 2004 to 38% at 31 December 2005) although the amount of such loans has remained relatively
constant. This reflects the impact of the pegging of the lat to the euro on 31 December 2004 on new borrowing
since then.
Reflecting relatively high interest rates for lat denominated loans and the pegging of the lat to euro, the volume of
the Group’s lat denominated loans has also slightly decreased as many clients with income in lats have preferred
to borrow in euros.
Loan by collateral type
As at 31 December 2005, loans and advances totalling LVL 21.1 million or 2.4% of the Group’s total portfolio of
gross loans and advances to customers were classified as zero risk since they were collateralised by cash deposits.
At 31 December 2004, the equivalent numbers were LVL 20.8 million and 3%, respectively.
63
The following table shows the outstanding amount of the Group’s gross loans and advances (showing the balance
sheet value of the loan) by primary type of collateral as at the dates indicated. Many of the Group’s loans are
secured by more than one type of collateral.
31/12/2005 31/12/2004
Group Group
LVL 000’s
Real estate 503,676 364,401
Transport vehicles 150,300 151,981
Securities 83,957 45,740
Deposits 21,151 20,835
Current and fixed assets (except for transport vehicles) 11,416 17,533
Loans secured by Latvian government guarantees 18,990 16,976
Loans to Latvian government 41 —
Loans to state owned enterprises 8,281 22,426
Loans to local municipalities in Latvia 3,400 3,409
Loans guaranteed by local municipalities in Latvia 1,151 1,189
Overdraft facilities 11,786 6,705
Due from investment and brokerage firms 17,687 11,951
Debit balances on settlement cards 21,901 13,530
Other 42,122 37,911
Total gross loans and advances to corporate customers 895,858 714,587
FIXED INCOME PORTFOLIO
At 31 December 2005, the amount of fixed income securities in the Group’s balance sheet was LVL 432 million
(equal to 23% of total Group assets). The Group’s fixed income portfolio generated LVL 19.7 million in interest
income in 2005 (equal to 15.3% of the Group’s total gross revenue in that year).
The following table shows the Group’s fixed income portfolio by the type of issuer as at the dates indicated.
31/12/2005 31/12/2004
Group Group
LVL 000’s
Government bonds 67,407 67,688
Municipality bonds 15,945 15,676
Credit institution bonds 203,851 120,173
Corporate bonds 102,703 82,082
Other financial institution bonds 37,161 9,661
Managed funds 7,620 10,572
Total gross fixed income securities 434,687 305,852
Less impairment allowance (2,626) (7,094)
Total net fixed income securities 432,061 298,758
The fixed income portfolio principally comprises bonds issued by credit institutions and corporates. 47% and
24%, respectively, of the gross fixed income securities in the portfolio at 31 December 2005 were issued by these
types of issuer. Bonds issued by credit institutions have also been the principal cause of growth in the portfolio
during 2005, registering an increase of 70% over the year.
64
The fixed income securities held by the Group are classified as held to maturity, available for sale or held for
trading. The table below shows the fixed income portfolio by this classification as at the dates indicated.
31/12/2005 31/12/2004
Group Group
LVL 000’s
Held for trading 24,178 17,850
Available for sale 342,469 245,328
Held to maturity 68,040 42,674
Total gross fixed income securities 434,687 305,852
Less impairment allowance (2,626) (7,094)
Total net fixed income securities 432,061 298,758
The following table shows the maturity profile of the Group’s fixed income securities as at the dates indicated.
31/12/2005 31/12/2004
Group Group
LVL 000’s
Falling due within:
1 month 944 761
1 – 3 months 2,415 1,894
3 – 6 months 620 5,931
6 – 12 months 1,926 10,179
1 – 5 years 209,191 158,609
more than 5 years 219,591 128,478
Total gross fixed income securities 434,687 305,852
The average maturity of the portfolio was extended in 2005 with 51% of securities having a maturity in excess of
five years at 31 December 2005, compared to 42% at 31 December 2004.
The following table shows the currency profile of the Group’s fixed income securities as at the dates indicated.
31/12/2005 31/12/2004
Group Group
LVL 000’s
USD 270,530 173,990
EUR 92,314 59,939
LVL 56,524 50,428
Other 12,693 14,401
Total net fixed income securities 432,061 298,758
During 2005 there was a slight increase in the proportion of USD and EUR denominated securities in the
portfolio (by 4% and 1%, respectively).
65
DEPOSITS
Deposits by remaining maturity
The following table shows the Group’s deposits by remaining maturity as at the dates indicated.
31/12/2005 31/12/2004
Group Group
LVL 000’s
Demand deposits 939,778 874,764
Term deposits:
due within 1 month 154,135 68,691
due within 1 – 3 months 34,892 33,239
due within 3 – 6 months 74,087 45,229
due within 6 – 12 months 92,096 67,164
due within 1 – 5 years 21,284 15,204
due in more than 5 years 1,652 1,280
Total term deposits 378,146 230,807
Total deposits from customers 1,317,924 1,105,571
Deposits by customer profile
The following table shows the Group’s deposits by customer profile as at the dates indicated.
31/12/2005 31/12/2004
Group Group
LVL 000’s
Government 2,792 26,523
Municipalities 8,922 15,360
Financial institutions 17,172 14,769
State owned enterprises 24,106 9,547
Public and religious institutions 6,281 8,323
Privately held companies 925,954 765,346
Private individuals 332,697 265,703
Total deposits from customers 1,317,924 1,105,571
Corporate customers accounted for 72.1% of total deposits as at 31 December 2005 (compared with 70.1% at
31 December 2004). The Group continued to increase its retail deposit funding base in 2005 and this represents
an important source of funding for the Group.
Deposits by residence of depositor
The following table shows the Group’s deposits by reported residence of the depositor as at the dates indicated.
31/12/2005 31/12/2004
Group Group
LVL 000’s
Latvian residents 388,280 317,763
Non-residents 929,644 787,808
Total deposits from customers 1,317,924 1,105,571
As at 31 December 2005, 70.5% of the Group’s total deposits were from customers with a reported residence
outside Latvia (compared to 71.3% at 31 December 2004). In 2005, deposits from Latvian corporate and private
clients grew by 22%, whilst non-resident deposits grew by 18%.
66
Deposits by currency
The following table shows the Group’s deposits by currency as at the dates indicated.
31/12/2005 31/12/2004
Group Group
LVL 000’s
USD 775,190 658,912
EUR 249,532 243,861
LVL 208,685 140,162
Other 84,517 62,636
Total deposits from customers 1,317,924 1,105,571
As at 31 December 2005, 58.8% of the Group’s deposits were US dollar denominated (compared to 59.6% at
31 December 2004). US dollar denominated deposits grew at a rate of 17.6% during 2005 and LVL denominated
deposits grew by 48.9% over the same period.
As at 31 December 2005, the Group held restricted deposits amounting to LVL 21.1 million (LVL 18.4 million as
at 31 December 2004). Restricted deposits are deposits which are used as collateral for loans made to customers
and therefore cannot be withdrawn until the loan is repaid.
67
RECENT DEVELOPMENTS AND THE BANKING SECTOR IN LATVIA
RECENT ECONOMIC DEVELOPMENTS IN LATVIA
The table below provides certain information in relation to the macroeconomic performance of Latvia since 2001.
As indicated in the table, real GDP growth has been significant, ranging between 6.5% and 10.2% in the five
years to 2005.
Macroeconomic indicators for
Latvia 2001 2002 2003 2004 2005
Population (millions) 2.36 2.35 2.33 2.32 2.30
GDP (nominal, LVL millions) 5,220 5,758 6,393 7,414 8,904
GDP per capita (LVL) 2,217 2,462 2,749 3,205 3,871
GDP real growth (%) 8.0 6.5 7.2 8.5 10.2
Consumer Price Index (%) 2.5 1.9 2.9 6.2 6.7
Unemployment (% of economically
active population) 7.7 8.5 8.6 8.5 8.5
(2)
Size of banking assets (LVL
millions)
(1)
3,459 4,423 5,717 7,850 10,943
Source: Central Statistical Bureau of Latvia except for:
(1) Association of Latvian Commercial Banks
(2) Forecasted by Ministry of Finance of Latvia
Based on a speech given by the Governor of the Bank of Latvia in January 2006, Latvian real GDP growth for
2005 was 10.2% and rapid economic expansion is expected to continue in 2006, with an approximate 8% increase
forecast for GDP in that year. In terms of inflation, the annual average inflation in 2005, at 6.7%, was 0.5% above
the 2004 level. The average consumer price rise recorded for 2005 was an all-time high since 1997 and is
considered a potential hazard to further rapid growth of the economy.
The Governor also noted in his speech that, according to preliminary information, the overall fiscal deficit of the
general government basic budget stood at LVL 97.1 million in 2005 (compared with LVL 133.8 million in 2004)
and, at the end of November 2005, the debt of the central and local governments totalled LVL 993.8 million.
THE LATVIAN BANKING SECTOR AND ITS DEVELOPMENT
As at 31 December 2005, there were 22 domestic banks in Latvia, one branch of a foreign bank and five
representative offices of foreign banks. In 2005 and based on data provided by the Association of Latvian Banks,
the Latvian banking sector made an aggregate LVL 193 million profit, a 66% increase from 2004 when the figure
was LVL 116 million. The total assets of the banking sector were LVL 10,943 million at 31 December 2005.
The Latvian banking sector has been largely privatised with only 6.6% of capital remaining in government
ownership. More than 50% of the remaining capital is foreign-owned.
Bank of Latvia
The main objective of the Bank of Latvia, as set out in the Law ‘‘On the Bank of Latvia’’ (the ‘‘Law’’) is to
regulate the amount of money in circulation with the aim of maintaining price stability through the
implementation of monetary policy.
The Bank of Latvia’s independence is guaranteed by the Law. The Governor of the Bank is appointed by the
Saeima of the Republic of Latvia. Likewise, upon the Governor’s recommendation, it appoints members of the
Board of Governors for a six-year term. The Governor, the Deputy Governor and any member of the Board of
Governors may be discharged before the end of his term of office only if he has tendered his resignation, been
convicted of certain criminal offences or is not able to officiate for a period exceeding six successive months
because of illness or another reason.
The Law prohibits the Bank of Latvia from granting direct credit to the Government to cover its budget deficit.
Similarly, the Bank of Latvia does not have the right to buy government securities on the primary market.
The Bank of Latvia has developed and is using the same full set of indirect market based monetary policy
instruments that are used by the European Central Bank.
68
On 18 May 2000, the Bank of Latvia was assigned quality management ISO 9002 certification. The Bank of
Latvia has adjusted its quality management system to the new version of the standard and on 7 May 2003
received certification confirming compliance with ISO 9001:2000.
Movement of capital and the payment system
Both current and capital account transactions have been fully liberalised in Latvia. There are virtually no
restrictions on cash and capital flows to and from Latvia. The Bank of Latvia ensures full convertibility of the lat
by buying from and selling to banks unlimited amounts of euro at their request.
In 2000, the Bank of Latvia introduced the real-time gross settlement system SAMS (an inter-bank automated
payment system), which enables safe and efficient settlement on the Latvian interbank market and in the Bank of
Latvia’s monetary policy operations. Along with Latvia’s full future participation in European Economic and
Monetary Union and the introduction of the euro, the Bank of Latvia also envisages joining TARGET, the single
European payment system.
Banking legislation
General. The legislative framework for banking in Latvia meets applicable EU requirements in full, and in some
areas the requirements are more rigorous. IFRS have been fully introduced and banks are audited by
internationally recognised auditing firms. Practical supervision of the banking sector in Latvia is tight and bank
inspections are conducted more frequently than in many other EU Member States.
Legislation. The Law ‘‘On Credit Institutions’’ (the ‘‘Banking Law’’), which has been in force since
24 October 1995, has been amended on several occasions. The instructions and regulations of the FCMC and the
Bank of Latvia complement the provisions of the Banking Law and are binding on all credit institutions. All
regulations for measuring the performance of credit institutions and their reporting procedures conform to
applicable EU standards.
The Law ‘‘On Prevention of Laundering of Proceeds Derived from Criminal Activity’’ which has been in force
since 1 June 1998 also conforms to the relevant EU directives: it requires customer identification and record
keeping on all transactions, identification of suspicious and unusual transactions, and their reporting to the Board
of Prevention of Legalization of Proceeds from Criminal Activity.
The Law ‘‘On Deposit Guarantees’’, which has been in force since 1 October 1998, provides that as of 1 January
2004, irrespective of the depositing date, deposits of up to LVL 9,000 per depositor to whom the provisions of
this law apply are guaranteed. By 2008, the amount of the guarantee is to be raised to LVL 13,000, the level
stipulated by the applicable EU directive. Certain groups of depositors are excluded from the guarantee
provisions.
Since 1 July 2001, the FCMC has been responsible for supervising the financial sector. According to the
International Monetary Fund, banking supervision in Latvia is among the strictest in Central and Eastern Europe.
LATVIA’S INTEGRATION IN THE EUROPEAN UNION AND INTRODUCTION OF THE EURO
Following Latvia’s accession to the EU, the Bank of Latvia’s policy has been aimed at preparing the country for a
full participation in European Economic and Monetary Union. Latvia currently complies with the interest rate
and budget deficit and government debt (as a percentage of GDP) Maastricht convergence criteria necessary for
joining such monetary union. However, its inflation rate remains above the required rate and it will not have
satisfied the exchange rate criteria until 1 January 2008 at the earliest.
The table below shows the relevant Maastricht criteria (other than the exchange rate criteria) and Latvia’s
performance in relation to them for the years indicated:
2004 2005
Criteria Performance Criteria Performance
Budget deficit (% of GDP) 3.0 1.0 3.0 1.0*
Government debt (% of GDP) 60.0 14.7 60.0 10.7*
Average annual inflation rate (%) 2.2 6.2 2.5 6.9
Interest rate on long-term government debt (%) 6.28 4.58 5.37 3.88
* Estimated by PAM.
69
On 1 January 2005, the lat was pegged to the euro and on 2 May 2005 Latvia joined the Exchange Rate
Mechanism II (ERM II). ERM II is both an arrangement for exchange rate pegging and a procedure for testing the
maturity of euro-adopting accession countries. Having joined ERM II, Latvia’s monetary system will have to
operate within it for at least two years to satisfy the applicable convergence criteria. Accordingly, adoption of the
euro is not expected to take place before 1 January 2008 at the earliest, assuming all other criteria are met.
70
TAXATION
The following is a general description of certain Latvian tax considerations relating to the Notes. It does not
purport to be a complete analysis of all tax considerations relating to the Notes whether in those countries or
elsewhere. Prospective purchasers of Notes should consult their own tax advisers as to the consequences under
the tax laws of the country of which they are resident for tax purposes and the tax laws of the Republic of Latvia
of acquiring, holding and disposing of Notes and receiving payments of interest, principal and/or other amounts
under the Notes. This summary is based upon the law as in effect on the date of this Prospectus and is subject to
any change in law that may take effect after such date.
EU Savings Tax Directive
Under European Council Directive 2003/48/EC on the taxation of savings income, each Member State is
required, from 1 July 2005, to provide to the tax authorities of another Member State details of payments of
interest or other similar income paid by a person within its jurisdiction to, or collected by such person for, an
individual resident in that other Member State; however, Austria, Belgium and Luxembourg may instead apply a
withholding system for a transitional period in relation to such payments, deducting tax at rates rising over time
to 35 per cent. The transitional period is to terminate at the end of the first-full fiscal year following agreement by
certain non-EU countries to the exchange of information relating to such payments.
Also with effect from 1 July 2005, a number of non-EU countries, and certain dependent or associated territories
of certain Member States, have agreed to adopt similar measures (either provision of information or transitional
withholding) in relation to payments made by a person within its jurisdiction to, or collected by such a person for,
an individual resident in a Member State. In addition, the Member States have entered into reciprocal provision of
information or transitional withholding arrangements with certain of those dependent or associated territories in
relation to payments made by a person in a Member State to, or collected by such a person for, an individual
resident in one of those territories.
Latvian Taxation
Under existing Latvian laws and regulations all payments of principal and interest in respect of the Notes and all
payments by the Issuer under the Subscription Agreement and the Issue Documents may be made free and clear
of, and without withholding or deduction for, any taxes, duties, assessments or governmental charges of
whatsoever nature imposed, levied, collected, withheld or assessed by Latvia or any political subdivision or
authority thereof or therein having power to tax, (1) except for fiscal obligations of the persons having some
connection to the Republic of Latvia other than the mere holding of the Notes; (2) or if the recipient of interest
income is a party related to the Issuer; (3) or where such withholding or deduction is imposed on a payment to an
individual, irrespective of the connection with the Republic of Latvia; (4) or the recipient of such income is a
person registered in a low or zero tax jurisdiction. In relation to items (3) and (4) above, payments under the
Notes will be made by the Issuer to the Fiscal Agent, a corporate entity, currently not registered in a low or zero
tax jurisdiction.
The gains realized by non-residents derived from the sale or exchange of the Notes will not be subject to any
Latvian income or capital gains tax, and no Latvian stamp duty, registration, transfer or similar taxes will be
payable in connection with the acquisition, ownership, sale or disposal of Notes by non-residents providing that
the sale or exchange of Notes will take place outside the territory of Latvia.
71
SUBSCRIPTION AND SALE
Deutsche Bank AG, London Branch and HSBC Bank plc (the ‘‘Joint-Lead Managers’’) and SC Parex banka and
Raiffeisen Zentralbank O
¨
sterreich Aktiengesellschaft (the ‘‘Co-Managers’’, together with the Joint-Lead
Managers, the ‘‘Managers’’) have, in a subscription agreement dated 3 May 2006 (the ‘‘Subscription
Agreement’’) and made between the Issuer and the Managers upon the terms and subject to the conditions
contained therein, jointly and severally agreed to subscribe and pay for the Notes at their issue price of 99.69 per
cent. of their principal amount plus any accrued interest in respect thereof and less a combined management,
selling and underwriting commission of 0.25 per cent. of their principal amount. The Issuer has also agreed to
reimburse Deutsche Bank AG, London Branch and HSBC Bank plc for certain of their expenses incurred in
connection with the management of the issue of the Notes. The Managers are entitled in certain circumstances to
be released and discharged from their obligations under the Subscription Agreement prior to the closing of the
issue of the Notes.
European Economic Area
In relation to each Member State of the European Economic Area which has implemented the Prospectus
Directive (each, a ‘‘Relevant Member State’’), each Manager has represented and agreed that with effect from
and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the
‘‘Relevant Implementation Date’’) it has not made and will not make an offer of Notes to the public in that
Relevant Member State prior to the publication of a prospectus in relation to the Notes which has been approved
by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant
Member State and notified to the competent authority in that Relevant Member State, all in accordance with the
Prospectus Directive, except that it may, with effect from and including the Relevant Implementation Date, make
an offer of Notes to the public in that Relevant Member State at any time:
(a) to legal entities which are authorised or regulated to operate in the financial markets or, if not so
authorised or regulated, whose corporate purpose is solely to invest in securities;
(b) to any legal entity which has two or more of (1) an average of at least 250 employees during the last
financial year; (2) a total balance sheet of more than E43,000,000 and (3) an annual net turnover of more
than E50,000,000, as shown in its last annual or consolidated accounts; or
(c) in any other circumstances which do not require the publication by the Issuer of a prospectus pursuant to
Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an ‘‘offer of Notes to the public’’ in relation to any Notes in
any Relevant Member State means the communication in any form and by any means of sufficient information on
the terms of the offer and the Notes to be offered so as to enable an investor to decide to purchase or subscribe the
Notes, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in
that Member State and the expression ‘‘Prospectus Directive’’ means Directive 2003/71/EC and includes any
relevant implementing measure in each Relevant Member State.
United States of America
The Notes have not been and will not be registered under the Securities Act and may not be offered or sold within
the United States or to, or for the account or benefit of, U.S. persons except in certain transactions exempt from
the registration requirements of the Securities Act. Terms used in this paragraph have the meanings given to them
by Regulation S.
Each Manager has agreed that, except as permitted by the Subscription Agreement, it will not offer, sell or deliver
the Notes, (a) as part of their distribution at any time or (b) otherwise, until 40 days after the later of the
commencement of the offering and the issue date of the Notes, within the United States or to, or for the account
or benefit of, U.S. persons, and that it will have sent to each dealer to which it sells Notes during the distribution
compliance period a confirmation or other notice setting forth the restrictions on offers and sales of the Notes
within the United States or to, or for the account or benefit of, U.S. persons.
In addition, until 40 days after commencement of the offering, an offer or sale of Notes within the United States
by a dealer (whether or not participating in the offering) may violate the registration requirements of the
Securities Act.
72
United Kingdom
Each Manager has further represented, warranted and undertaken to the Issuer and to each other Manager that:
(a) Financial promotion: it has only communicated or caused to be communicated, and will only
communicate or cause to be communicated, any invitation or inducement to engage in investment activity
(within the meaning of section 21 of the FSMA) received by it in connection with the issue or sale of any
Notes in circumstances in which section 21(1) of the FSMA does not apply to the Issuer; and
(b) General compliance: it has complied and will comply with all applicable provisions of the FSMA with
respect to anything done by it in relation to the Notes in, from or otherwise involving the United
Kingdom.
Republic of Italy
The offering of the Notes has not been registered pursuant to the Italian securities legislation and, accordingly,
each of the Managers has represented and agreed that it has not offered or sold, and will not offer or sell, any
Notes in the Republic of Italy in a solicitation to the public, and that sales of the Notes in the Republic of Italy
shall be effected in accordance with all Italian securities, tax, exchange control and other applicable laws and
regulations. In any case, the Notes will not be sold, either in the primary or in the secondary market, to
individuals residing in the Republic of Italy.
Each of the Managers has represented that it has not offered, sold or delivered, and will not offer, sell or deliver
any Notes or distribute copies of the Prospectus or any other document relating to the Notes in the Republic of
Italy except to ‘‘Professional investors’’, as defined in Article 31.2 of CONSOB Regulation No. 11522 of 1 July
1998 (‘‘Regulation No. 11522’’), as amended, pursuant to Articles 30.2 and 100 of Legislative Decree No. 58 of
24 February 1998 (‘‘Decree No. 58’’), or in any other circumstances where an express exemption from
compliance with the solicitation restrictions provided by Decree No. 58 or CONSOB Regulation No. 11971 of
14 May 1999 applies, provided however, that any such offer, sale or delivery of Notes or distribution of copies of
the Prospectus or any other document relating to the Notes in the Republic of Italy must be:
(a) made by investment firms, banks or financial intermediaries permitted to conduct such activities in the
Republic of Italy in accordance with Legislative Decree No. 385 of 1 September 1993 (‘‘Decree No.
385’’), Decree No. 58, Regulation No. 11522 and any other applicable laws and regulations:
(b) in compliance with Article 129 of Decree No. 385 and the implementing instructions of the Bank of Italy,
pursuant to which the issue, offer or placement of securities in Italy is subject to prior notification to the
Bank of Italy, unless an exemption, depending inter alia, on the aggregate amount of securities issued,
offered or placed and the characteristics of the securities, applies;
(c) in compliance with the banking transparency requirements set forth in Decree No. 385 and the
implementing regulations and decrees; and
(d) in compliance with any other applicable notification requirement or limitation which may be imposed by
CONSOB or the Bank of Italy.
Republic of Latvia
Each Manager has represented, warranted and undertaken to the Issuer and each other Manager that:
(a) No offer to public: Notes have not been registered under the 2004-01-01 Law on the Financial Instruments
Market of Latvia and may not be publicly offered or sold within the territory of the Republic of Latvia.
(b) No public financial promotion: it has not publicly offered, and will not offer to be sold, any Note within
the Republic of Latvia and that neither it nor any of its affiliates, nor any persons acting on its or their
behalf, have engaged or will engage in any directed public selling efforts in the Republic of Latvia with
respect to the Notes.
(c) General compliance: (A) It has not offered or sold, and will not offer or sell, the Notes to a person who is
a resident of the Republic of Latvia other than in accordance with the laws of the Republic of Latvia and
the Rules of the Financial and Capital Market Commission in Latvia and; (B) it has not delivered and will
not deliver within the Republic of Latvia any Notes in definitive form that are sold.
73
Save for obtaining the approval of the Prospectus by the UK Listing Authority in accordance with Part VI of the
FSMA, no action has been or will be taken in any jurisdiction by the Issuer or any Manager that would, or is
intended to, permit a public offering of the Notes, or possession or distribution of this Prospectus or any other
offering material, in any country or jurisdiction where action for that purpose is required. Persons into whose
hands this Prospectus comes are required by the Issuer and the Managers to comply with all applicable laws and
regulations in each country or jurisdiction in which they purchase, offer, sell or deliver Notes or have in their
possession, distribute or publish this Prospectus or any other offering material relating to the Notes, in all cases at
their own expense.
74
GENERAL INFORMATION
1. The creation and issue of the Notes has been authorised by a shareholder resolution of the Issuer dated
24 March 2006. The Issuer has obtained all necessary consents, approvals and authorisations in the
Republic of Latvia in connection with the issue and performance of the Notes.
2. There are no governmental, legal or arbitration proceedings (including any such proceedings which are
pending or threatened, of which the Issuer is aware) during the 12 month period prior to the date of this
Prospectus, which may have, or have had in the recent past, a significant effect on the financial position or
profitability of the Issuer and its subsidiaries.
3. There has been no significant change in the financial or trading position of the Issuer and its subsidiaries
taken as a whole since 31 December 2005 and, since such date there has been no material adverse change
in the prospects of the Issuer and its subsidiaries taken as a whole.
4. The consolidated financial statements of the Issuer dated 31 December 2005 and 31 December 2004 have
been audited without qualification for the three financial years immediately preceding the date of this
Prospectus by SIA Ernst & Young Baltic independent accountants of Kronvalda Boulevard 3-5, LV-1010,
Riga, Latvia.
5. The Issuer will, at its registered office and at the Specified Offices of the Paying Agents, make available
for physical inspection during normal office hours, free of charge, upon oral or written request, a copy of
this Prospectus. Written or oral requests for such documents should be directed to the Specified Office of
any Paying Agent.
6. Copies of the following documents (together with English translations thereof) will be available for
inspection, during normal business hours at the registered offices of the Issuer and of JPMorgan Chase
Bank, N.A. during the life of this Prospectus:
(a) the constitutive documents of the Issuer;
(b) the Fiscal Agency Agreement and the Deed of Covenant; and
(c) the auditor’s report and audited consolidated financial statements of the Issuer for the years ended
31 December 2005 and 31 December 2004.
7. The Notes have been accepted for clearance through Euroclear and Clearstream, Luxembourg. The ISIN
is XS0253533318 and the common code is 025353331.
8. The listing of the Notes on the gilt-edged and fixed interest market of the London Stock Exchange will be
expressed in Euro as a percentage of their principal amount (exclusive of accrued interest). Transactions
will normally be effected for settlement in Euro for delivery on the third business day in London after the
date of the transaction. It is expected that the Notes will be admitted to the Official List of the UK Listing
Authority on 5 May 2006, subject only to the issue of the Global Note Certificate. However, prior to
official listing, dealings in the Notes will be permitted by the London Stock Exchange in accordance with
its rules. The total expenses related to the admission to trading of the Notes on the gilt-edged and fixed
interest market of the London Stock Exchange equal approximately EUR 9,706.
75
FINANCIAL STATEMENTS AND AUDITOR’S REPORTS
CONTENTS
Audited Consolidated Financial Statements as at and for the years ended
31 December 2005 and 2004
Auditors’ Report for the year ended 31 December 2005 ; ; ; ; ; ; ; F-2
Financial Statements for the year ended 31 December 2005 ; ; ; ; ; ; F-3
Auditors’ Report for the year ended 31 December 2004 ; ; ; ; ; ; ; F-50
Financial Statements for the year ended 31 December 2004 ; ; ; ; ; ; F-51
F-1
F-2
AS Parex banka
Statements of Income
for the years ended 31 December 2005 and 2004



11
LVL 000’s
2005 2005 2004 2004
Notes Group Bank Group Bank

Interest income 4 78,899 72,515 58,518 54,096
Interest expense 4 (32,425) (31,581) (19,848) (19,153)
Net interest income 46,474 40,934 38,670 34,943

Commission and fee income 5 32,528 30,049 23,897 21,612
Commission and fee expense 5 (6,794) (7,058) (5,074) (5,098)
Net commission and fee income 25,734 22,991 18,823 16,514

Profit on trading with financial instruments, net 6 15,484 13,833 13,227 12,190
Other operating income 7 2,135 1,625 1,920 1,287
Net operating income 89,827 79,383 72,640 64,934

Administrative expense 8,9 (47,722) (41,539) (38,800) (33,933)
Depreciation and amortisation expense 21,22 (6,347) (5,773) (6,318) (5,580)
Other operating expense (804) (340) (344) (340)

Impairment of financial assets 10 (2,722) (2,674) (9,109) (8,672)
Reversals of impairment of financial assets 10 5,347 5,229 1,010 715

Profit from investments in subsidiaries 20 - - (419) -

Profit before corporate income tax and minority
interest 37,579 34,286 18,660 17,124

Corporate income tax 11 (4,365) (4,111) (2,206) (2,020)

Profit before minority interest 33,214 30,175 16,454 15,104

Minority interest - - (2) -

Net profit for the year 33,214 30,175 16,452 15,104


The financial statements have been approved by the Management of the Bank and signed on their behalf by:







Valery Kargin
President/
Chairman of the Board
Viktor Krasovitsky
Chairman of the Council of
Directors
Guntars GrƯnbergs
Chairman of the Council

Riga,
3 March 2006








The accompanying notes are an integral part of these financial statements.
F-3
F-3
AS Parex banka
Balance Sheets and Memorandum Items
as at 31 December 2005 and 2004



12
LVL 000’s
31/12/2005 31/12/2005 31/12/2004 31/12/2004
Notes Group Bank Group Bank
Assets

Cash and deposits with central banks 12 144,079 136,835 70,781 63,748
Balances due from credit institutions 13 312,583 311,968 312,870 320,259
Loans and advances to customers 14,15,16 879,262 810,958 691,693 640,349
Fixed income securities 17,18 432,061 411,690 298,758 274,122
Shares and other non-fixed income securities 19 30,467 29,104 11,512 11,429
Investments in subsidiaries 20 - 21,547 - 18,559
Derivative financial instruments 30 564 698 1,405 1,414
Intangible assets 21 2,805 1,223 3,497 1,914
Fixed assets 22 23,771 19,788 23,169 19,452
Prepayments and accrued income 23 10,340 9,338 8,334 8,006
Current income tax prepayment 11 - - 729 657
Other assets 24 6,404 3,860 1,733 1,533
Total assets 1,842,336 1,757,009 1,424,481 1,361,442

Liabilities

Balances due to credit institutions and central
banks 26 262,996 258,764 172,250 162,663
Deposits from customers 27 1,317,924 1,252,015 1,105,571 1,058,256
Issued debt securities 25 74,070 74,070 - -
Derivative financial instruments 30 2,366 2,376 3,310 3,322
Accrued expense and deferred income 7,695 6,849 4,354 3,510
Current income tax liability 11 772 750 - -
Deferred income tax liability 11 608 567 905 901
Provision for liabilities and charges 109 - 56 56
Other liabilities 28 17,705 7,497 11,648 7,574
Total liabilities 1,684,245 1,602,888 1,298,094 1,236,282

Shareholders’ equity

Paid-in share capital 29 65,027 65,027 65,027 65,027
Share premium 12,694 12,694 12,694 12,694
Fair value revaluation reserve 2,358 2,503 3,867 3,717
Retained earnings 78,000 73,897 44,786 43,722
Total shareholders’ equity attributable to
shareholders of the Bank 158,079 154,121 126,374 125,160

Minority interest 12 - 13 -

Total shareholders’ equity 158,091 154,121 126,387 125,160

Total liabilities and shareholders’ equity 1,842,336 1,757,009 1,424,481 1,361,442

Memorandum items

Contingent liabilities 30 21,115 21,281 25,900 25,888
Financial commitments 30 190,824 197,708 125,296 127,825
Foreign exchange contracts 30 703,087 717,401 805,001 816,745
Other financial instruments 30 105,013 105,013 25,592 25,592
Funds under trust management 31 166,053 3,013 170,514 131,829

The financial statements have been approved by the Management of the Bank and signed on their behalf by:




Valery Kargin
President/
Chairman of the Board
Viktor Krasovitsky
Chairman of the Council of
Directors
Guntars GrƯnbergs
Chairman of the Council

Riga,
3 March 2006
The accompanying notes are an integral part of these financial statements.
F-4
F-4
AS Parex banka
Statements of Changes in Shareholders’ Equity
for the years ended 31 December 2005 and 2004



13
Changes in the Group’s shareholders’ equity are as follows:

Attributable to shareholders of the Bank



Paid-in
share
capital

Share
premium
Fair value
revaluation
reserve

Retained
earnings Total

Minority
interest
Total
shareholders’
equity

Balance as at 1 January 2004 63,327 9,226 4,270 31,334 108,157 11 108,168

Issue of new shares 1,700 3,468 - - 5,168 - 5,168

Dividends paid - - - (3,000) (3,000) - (3,000)

Fair value revaluation reserve
charged to statement of income

-

-

(5,611)

-

(5,611)

- (5,611)

Changes in fair value of available
for sale securities -

- 5,550 - 5,550

- 5,550

Deferred income tax charged
directly to equity - - (342) - (342) - (342)

Changes in minority interest - - - - - 2 2

Net profit for the year - - - 16,452 16,452 - 16,452

Balance as at 31 December 2004 65,027 12,694 3,867 44,786 126,374 13 126,387

Fair value revaluation reserve
charged to statement of income - - (4,284) - (4,284) - (4,284)

Changes in fair value of available
for sale securities - - 2,621 - 2,621 - 2,621

Deferred income tax charged
directly to equity - - 154 - 154 - 154

Changes in minority interest - - - - - (1) (1)

Net profit for the year - - - 33,214 33,214 - 33,214

Balance as at 31 December 2005 65,027 12,694 2,358 78,000 158,079 12 158,091


















The accompanying notes are an integral part of these financial statements.
F-5 F-5
AS Parex banka
Statements of Changes in Shareholders’ Equity
for the years ended 31 December 2005 and 2004



14
Changes in the Bank’s shareholders’ equity are as follows:




Paid-in
share
capital

Share
premium
Fair value
revaluation
reserve

Retained
earnings

Total

Balance as at 1 January 2004 (as previously
reported) 63,327 9,226 4,270 31,334 108,157

Effect of adoption of revised standards
(Note 2) - - (150) 284 134

Balance as at 1 January 2004 (adjusted –
see Note 2) 63,327 9,226 4,120 31,618 108,291

Issue of new shares 1,700 3,468 - - 5,168

Dividends paid - - - (3,000) (3,000)

Fair value revaluation reserve charged to
statement of income - -

(5,611)

-

(5,611)

Changes in fair value of available for sale
securities - - 5,550 - 5,550

Deferred income tax charged directly to
equity - - (342) - (342)

Net profit for the year - - - 15,104 15,104

Balance as at 31 December 2004 65,027 12,694 3,717 43,722 125,160

Fair value revaluation reserve charged to
statement of income - - (4,112) - (4,112)

Changes in fair value of available for sale
securities - - 2,751 - 2,751

Deferred income tax charged directly to
equity - - 147 - 147

Net profit for the year - - - 30,175 30,175

Balance as at 31 December 2005 65,027 12,694 2,503 73,897 154,121
















The accompanying notes are an integral part of these financial statements.
F-6
F-6
AS Parex banka
Statements of Cash Flows
for the years ended 31 December 2005 and 2004



15

LVL 000’s
2005 2005 2004 2004
Notes Group Bank Group Bank
Cash inflow from operating activities
Profit before taxation and minority interest 37,579 34,286 18,660 17,124
Amortisation of intangible assets, depreciation of fixed
assets 6,347 5,773 6,318 5,580
Change in impairment allowances (2,625) (2,555) 8,189 7,938
(Profit) from investments in subsidiaries - - 419 -
Increase in cash and cash equivalents before changes in
assets and liabilities 41,301 37,504 33,586 30,642


(Increase) in prepayments and accrued income (2,006) (1,332) (3,069) (2,900)
Change in derivative financial instruments (1,079) (1,206) (43) (69)
Decrease/ (increase) in other assets (3,213) (1,013) 1,410 135
Increase in accrued expense and deferred income 3,341 3,339 1,053 651
Increase/ (decrease) in other liabilities 3,396 (1,925) 4,690 4,904
Decrease/ (increase) in trading investments (26,231) (24,785) 18,305 18,202
Decrease/ (increase)in balances due from credit
institutions 32,228 58,623 (144,081) (144,318)
(Increase) in loans and advances to customers (185,154) (168,373) (223,647) (202,096)
Increase/ (decrease) in balances due to credit institutions 131,695 131,172 66,564 59,382
Increase in deposits from customers 212,353 193,759 269,986 257,278
Increase in cash and cash equivalents from operating
activities before corporate income tax 206,631 225,763 24,754 21,811

Corporate income tax (paid) (2,441) (2,357) (3,440) (3,181)

Net cash and cash equivalents from operating activities 204,190 223,406 21,314 18,630

Cash (outflow) from investing activities
(Purchase) of intangible and fixed assets (6,257) (5,418) (6,165) (5,631)
Acquisitions and investments in subsidiaries - (2,988) (6,710) (10,178)
Sale/ (purchase) of equity investments and other non-
trading investments (126,791) (131,556) 34,568 31,874
(Decrease) in cash and cash equivalents from investing
activities (133,048) (139,962) 21,693 16,065

Cash inflow from financing activities
Proceeds from issue of new shares - 5,168 5,168
Dividends (paid) - (3,000) (3,000)
Proceeds from debt securities issue 75,046 75,046 - -
Increase in cash and cash equivalents from financing
activities 75,046 75,046 2,168 2,168

Net cash inflow for the year 146,188 158,490 45,175 36,863

Cash and cash equivalents at the beginning of the year 32 152,640 135,043 107,465 98,180

Cash and cash equivalents at the end of the year
32 298,828 293,533 152,640 135,043


Interest received/ paid by the Bank and the Group during the reporting year is not materially different from
interest income/ expense recognised in the statement of income.






The accompanying notes are an integral part of these financial statements.
F-7
F-7
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005


F-8

NOTE 1. INFORMATION ON THE BANK

(Figures in parenthesis represent amounts as at 31 December 2004 or for the year then ended.)

AS Parex banka (hereinafter – the Bank) was registered as a joint stock company on 14 May 1992. The Bank
commenced its operations in June 1992.

The Bank’s head office and three main branches are located in Riga, Latvia. As at 31 December 2005, the Bank
was operating a total of 90 (95) branches and client service centres in Riga and throughout Latvia and two
branches in Tallin (Estonia) and Berlin (Germany). The Bank operates 8 representative offices: in Frankfurt
(Germany), Stockholm (Sweden), Tokyo (Japan), Kiev and Dnipropetrovsk (Ukraine), Baku (Azerbaijan),
Tashkent (Uzbekistan) and Sofia (Bulgaria), as well as a subsidiary – Parex Group Representation Limited in
London (United Kingdom) acting as the Bank’s representative office. The Bank owns also 25 other subsidiaries
which operate in various financial markets sectors as described in Note 20.

The Bank’s main areas of operation include accepting deposits from customers, granting short-term and long-term
loans to the State Treasury, local municipalities, corporate customers, private individuals and other credit
institutions, issuing and servicing payment cards, dealing with finance lease and foreign exchange transactions.
The Bank offers its clients also trust management and investment banking services, performs local and
international payments, as well as provides a wide range of other financial services.

As at 31 December 2005, the Bank had 2,120 (1,970) employees, 20,710 (20,630) loan and finance lease
customers, 136,006 (104,524) settlement card holders and 199,700 (167,450) deposit customers. The main
shareholders of the Bank are Latvian citizens Mr. Valery Kargin and Mr. Viktor Krasovitsky (see Note 29).

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These financial statements have been prepared in accordance with International Financial Reporting Standards
(IFRS), which comprise standards and interpretations approved by the International Accounting Standards Board
(IASB), and International Accounting Standards and Standing Interpretations Committee interpretations approved
by the International Accounting Standards Committee (IASC), effective as at 31 December 2005. Certain
disclosures are prepared in the format required by the Financial and Capital Market Commission (FCMC).

A summary of the Group’s principal accounting policies, all of which have been applied consistently throughout
the years ended 31 December 2005 and 2004, except that the Group has adopted those new/ revised standards
mandatory for financial years beginning on or after 1 January 2005, is set out below.

Changes in Accounting Policies
In 2005 the Group adopted those IFRS that were amended in 2004 and are mandatory for financial years beginning
on or after 1 January 2005. The adoption of those standards did not result in substantial changes to the Group’s
accounting policies, except for:
- IFRS 3, IAS 36 and IAS 38, which have affected the treatment of goodwill;
- IAS 27, which has changed the measurement of investments in subsidiaries.
The principle effects of these changes in policies are described below.

IFRS 3 “Business Combinations”

The adoption of IFRS 3 and related IAS 36 (revised 2004) and IAS 38 (revised 2004) has resulted in a change in
the accounting policy for goodwill. Until 31 December 2004, goodwill had been:
- Amortised on a straight-line basis; and
- Assessed for an indication of impairment at each balance sheet date.
In accordance with the provisions of IFRS 3:
- The Group ceased amortization of goodwill from 1 January 2005;
- Accumulated amortization as at 31 December 2004 has been eliminated with a corresponding decrease in
the cost of goodwill;
- From the year ended 31 December 2004 onwards, goodwill is tested annually for impairment, as well as
when there are indications of impairment.
F-9
F-10
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



19
The carrying amount of deferred corporate income tax asset, if any, is reviewed at each balance sheet date and
reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of
the deferred income tax asset to be utilised.

h) Leases

Finance – Group as lessor

Finance leases, which confer rights and obligations similar to those attached to owned assets, are recognised as
assets and liabilities at amounts equal at the inception of the lease to the fair value of the leased property or, if
lower, at the present value of the minimum lease payments. The finance income is allocated to periods during the
lease term to produce a constant periodic return on the net investments outstanding in respect of the finance leases.

For the purposes of these financial statements, finance lease receivables are included in loans and advances to
customers.

Operating – Group as lessor

The Group presents assets subject to operating leases in the balance sheets according to the nature of the asset.
Lease income from operating leases is recognized in statement of income on a straight-line basis over the lease term
as other income. The aggregate cost of incentives provided to lessees is recognized as a reduction of rental income
over the lease term on a straight-line basis. Initial direct costs incurred specifically to earn revenues from an
operating lease are added to the carrying amount of the leased asset.

The depreciation policy for depreciable leased assets is consistent with the lessor’s normal depreciation policy for
similar assets, and depreciation is calculated in accordance with accounting policies, used for the Group’s property,
plant and equipment.

Operating – Group as lessee

Leases of assets under which the risks and rewards of ownership are effectively retained by the lessor are classified
as operating leases. Lease payments under an operating lease are recognized as expenses on a straight-line basis
over the lease term and included into other administrative and operating expenses.

i) Impairment of loans and receivables

The Group has granted commercial and consumer loans to customers throughout its market area. The economic
condition of the market area may have an impact on the borrowers’ ability to repay their debts. The Management of
the Group have considered both specific and portfolio-level risks in determining the balance of impairment
allowance for possible credit losses. Impairment allowance for possible credit losses is established to represent the
estimated amounts of probable losses that have been incurred at the balance sheet date. The specific element of the
impairment relates to credits that have objective evidence of impairment. The specific impairment loss is determined
after individual review of all credits with objective indications of potential impairment. The collective impairment
of the loan portfolio relates to the potential losses, which experience indicates are present in the Group’s portfolio of
loans and receivables, but have not yet been specifically identified through the specific review of those financial
assets.

The specific impairment for possible credit losses is assessed as a difference between the present value of expected
future cash flows discounted at the loans’ original effective interest rate and the loan’s outstanding balance. The
value of collateral held in connection with loans is based on the estimated realisable value of the asset and is taken
into account when estimating present values of expected future cash flows.

The collective impairment allowance is estimated based upon historical pattern of losses in the loan portfolio, as
well as taking into account credit concentration risk, changes in collateral values, current economic conditions and
general market or operating events that have occurred prior to the balance sheet date and might negatively impact
the future cash flows from certain loans and receivables balances outstanding, but for which a specific credit risk
provision is not yet quantifiable.

Non-performing loans and receivables from customers, including banking institutions, are defined as loans and
other credit balances in which contractually due principal is 14 days or more overdue, contractually due interest is
F-11
F-11
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



20
90 days or more overdue, or the Management otherwise believe that the contractual interest or principal due will not
be collected.

When loans and advances cannot be recovered, they are written-off and charged against impairment allowance.
They are not written-off until all the necessary legal procedures have been completed and the amount of the loss is
finally determined.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively
to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed.
Any subsequent reversal of an impairment loss is recognised in the statement of income, to the extent that the
carrying value of the asset does not exceed its amortised cost at the reversal date.

j) Financial assets

The Group recognises financial asset on its balance sheet when, and only when, the Group becomes a party to the
contractual provisions of the instrument.

Financial assets in the scope of IAS 39 are classified as either financial assets at fair value through profit or loss,
loans and receivables, held-to-maturity investments, or available-for-sale financial assets, as appropriate. When
financial assets are recognised initially, they are measured at fair value, plus, in the case of investments not at fair
value through profit or loss, directly attributable transaction costs. The classification of investments between the
categories is determined at acquisition based on the guidelines established by the Management.

All “regular way” purchases and sales of investments are recognised using settlement date accounting. The
settlement date is the date when an asset is delivered to or by the Group. Settlement day refers to the recognition of
an asset on the day it is transferred to the Group and to the derecognition of an asset, on the day that it is transferred
by the Group. All other purchases or sales are recognised as derivative instruments until settlement occurs.

Financial assets at fair value through profit and loss

Financial assets classified as held for trading are included in the category “financial assets at fair value through
profit or loss”. Financial assets are classified as held for trading if they are either acquired for generating a profit
from short-term fluctuations in price or dealer’s margin, or are included in a portfolio in which a pattern of short-
term profit taking exists. Held for trading financial assets are initially recognised at cost and subsequently re-
measured at fair value based on available market prices. The result of re-measuring trading financial assets at fair
value is charged directly to the statement of income.

Held to maturity investments

Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held to
maturity if the Group has both the positive intent and ability to hold these investments to maturity. Held to maturity
financial assets are carried at amortised cost using the effective interest rate method, less any allowance for
impairment.

A financial asset is impaired if its carrying amount is greater than its estimated recoverable amount. The amount of
the impairment loss for assets carried at amortised cost is calculated as the difference between the asset’s carrying
amount and the present value of expected future cash flows discounted at the financial instrument’s original
effective interest rate.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in
an active market. Such assets are carried at amortised cost using the effective interest method. Gains and losses are
recognised in income when the loans and receivables are derecognised or impaired, as well as through the
amortisation process.

Loans and receivables are recognised at their settlement date. From the date of signing a contractual agreement till
the settlement date they are accounted for as off balance sheet items.

When the loans and advances cannot be recovered, they are written-off and charged against impairment for possible
F-12
F-12
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



21
credit losses. The management of the Group makes the decision on writing-off loans. Recoveries of loans
previously written-off are credited to the statement of income.

Available for sale financial assets

Available for sale financial assets are those non-derivative financial assets that are designated as available-for-sale
or are not classified in any of the three preceding categories. The Group’s available for sale financial assets are
intended to be held for an undefined period of time, which may be sold in response to needs for liquidity or changes
in interest rates, exchange rates or equity prices are classified as available for sale.

Available for sale financial assets are initially stated at cost and subsequently re-measured at fair value based on
available market prices or quotes of brokers. The result of fair value revaluation of available for sale securities is
recognised in equity as a fair value revaluation reserve. The difference between the cost and amortised cost
determined by the effective interest rate method is treated as interest income or expense. When the securities are
disposed of, the related accumulated fair value revaluation is included in the statement of income as profit/(loss)
from trading with securities available for sale. If there is objective evidence that the value of an investment has been
impaired, the cumulative net loss that has been recognised directly in equity is charged to the statement of income
and the asset is stated in the balance sheet at the recoverable amount calculated as discounted future cash flows
using current market interest rate for similar financial assets.

k) Derecognition of Financial Assets and Liabilities

Financial assets

A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is
derecognised where:
x the rights to receive cash flows from the asset have expired;
x the Group has transferred its rights to receive cash flows from the asset, or retained the right to receive cash
flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party
under a ‘pass-through’ arrangement; and
x the Group either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither
transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the
asset.

Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor
retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is
recognised to the extent of the Group’s continuing involvement in the asset. Continuing involvement that takes the
form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset
and the maximum amount of consideration that the Group could be required to repay.

Where continuing involvement takes the form of a written and/or purchased option (including a cash-settled option
or similar provision) on the transferred asset, the extent of the Group’s continuing involvement is the amount of the
transferred asset that the Group may repurchase, except that in the case of a written put option (including a cash-
settled option or similar provision) on an asset measured at fair value, the extent of the Group’s continuing
involvement is limited to the lower of the fair value of the transferred asset and the option exercise price.

Financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

Where an existing financial liability is replaced by another from the same lender on substantially different terms, or
the terms of an existing liability are substantially modified, such an exchange or modification is treated as a
derecognition of the original liability and the recognition of a new liability, and the difference in the respective
carrying amounts is recognised in profit or loss.

l) Intangible Assets

Intangible assets in Group accounts comprise goodwill from the acquisition of subsidiaries, as well as software,
capitalised costs relating to leasehold rights and other intangible assets.
F-13
F-13
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



22

Goodwill arising from the acquisition of subsidiaries in Group accounts is recorded at cost less any accumulated
impairment losses. Goodwill is tested for impairment at each reporting date, or more frequently if events or changes
in circumstances indicate that the goodwill might be impaired.

Leasehold rights are amortised over the remaining lease contract on a straight-line basis. Annual amortisation rates
applied on a straight-line basis to software and other intangible assets range from 20% to 50%.

m) Fixed Assets

Fixed assets are recorded at historical cost less accumulated depreciation less any impairment losses. Fixed assets
are periodically reviewed for impairment. If the recoverable value of a fixed asset is lower than its carrying amount,
the respective asset is written down to its recoverable value.

Depreciation is calculated using the straight-line method based on the estimated useful life of the asset. The
following depreciation rates have been applied:


Category
Annual
depreciation rate

Buildings 2%
Transport vehicles 20%
Other fixed assets 20% - 33%

Leasehold improvements are capitalised and depreciated over the remaining lease contract period on a straight-line
basis. Assets under construction are not depreciated.

Certain reconstruction and renovation costs of buildings, which improve their quality and performance, are
capitalised and amortised over the estimated useful life of the reconstruction works on a straight-line basis.

Maintenance and repair costs are charged to the statement of income as incurred.

n) Sale and Repurchase Agreements

These agreements are accounted for as financing transactions. Under sale and repurchase agreements, where the
Group is the transferor, assets transferred remain on the Group’s balance sheet and are subject to the Group’s usual
accounting policies, with the purchase price received included as a liability owed to the transferee.

Where the Group is the transferee, the assets are not included in the Group’s balance sheet, but the purchase price
paid by it to the transferor is included as an asset. Interest income or expense arising from outstanding sale and
repurchase agreements is recognised in the statement of income over the term of the agreement.

o) Derivative Financial Instruments and Hedging

In the ordinary course of business, the Group engages as a party to contracts for forward foreign exchange rate,
currency and interest rate swap instruments and other financial instruments. For the accounting purposes, all
derivatives are classified as held for trading purposes and accounted for as follows.

Subsequent to initial recognition and measurement, outstanding forward foreign exchange rate contracts, currency
swaps and other financial instruments are carried in the balance sheet at their fair value. The fair value of these
instruments is recognised on the balance sheet under designated assets and liabilities caption “Derivative financial
instruments”. The notional amounts of these financial instruments are reported in off-balance sheet accounts.

Gains or losses from changes in the fair value of outstanding forward foreign exchange rate contracts, currency and
interest rate swaps and other financial instruments are recognised in the statement of income as they arise.

Hedge accounting

For the purposes of hedge accounting, hedges are classified into two categories: (a) fair value hedges which hedge
the exposure to changes in the fair value of a recognised asset or liability; and (b) cash flow hedges which hedge
F-14
F-14
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



23
exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset
or liability or a forecasted transaction.

In relation to hedges (fair value and cash flow hedges), which meet the conditions for hedge accounting, any gain or
loss from re-measuring the hedging instrument to fair value is recognised immediately in the statement of income
and the part of effective cash flow hedge is accounted for in equity. The hedged item is adjusted for fair value
changes relating to the risk being hedged and the difference is recognised in the statement of income. Where the
adjustment relates to a hedged interest-bearing financial instrument, the adjustment is amortised to the statement of
income on a systematic basis so that it is fully amortised by its maturity date.

For hedges, which do not qualify for hedge accounting, any gains or losses arising from changes in the fair value of
the hedging instrument are taken directly to the statement of income for the period.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no
longer qualifies for hedge accounting.

p) Borrowings

The Group recognises financial liability on its balance sheet when, and only when, the Group becomes a party to the
contractual provisions of the instrument.

In the balance sheet borrowings are recognised initially at cost amounting to their issue proceeds net of transaction
costs. Subsequently borrowings are stated at amortised cost and any difference between net proceeds and value at
redemption is recognised in the statement of income over the period of borrowings using the effective interest rate.

q) Off-balance Sheet Financial Commitments and Contingent Liabilities

In the ordinary course of business, the Group is involved with off-balance sheet financial commitments and
contingent liabilities comprising commitments to extend loans and advances, commitments for unutilised credit
lines or credit card limits, financial guarantees and commercial letters of credit. Such commitments and contingent
liabilities are recorded in the financial statements when the commitment is established.

Commitments to extend loans and advances and commitments for unutilised credit lines or credit card limits
represent contractual commitments to make loans and revolving credits. Commitments generally have fixed
expiration dates, or other termination clauses. Since commitments may expire without being drawn upon, the total
contract amounts do not necessarily represent future cash requirements.

Financial guarantees and letters of credit commit the Group to make payments on behalf of customers contingent
upon the failure of a customer to perform under the terms of the contract. Accordingly, they do not present a
commitment or result in an outflow of funds until the customer defaults.

The methodology for provisioning against possible losses arising from off-balance sheet financial commitments and
contingent liabilities is consistent with that adopted for loans and advances to customers as described in paragraph
r) below.

r) Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it
is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a
reliable estimate of the amount of the obligation can be made.

s) Trust Activities

Funds managed by the Group on behalf of individuals, corporate customers, trusts and other institutions are not
regarded as assets of the Group and, therefore, are not separately included in the balance sheet. Funds under trust
management are presented in these financial statements only for disclosure purposes.

t) Fair Values of Financial Assets and Liabilities

Fair value represents the amount at which an asset could be exchanged or a liability settled on an arm’s length basis.
Where, in the opinion of the Management, the fair values of financial assets and liabilities differ materially from
F-15
F-15
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



24
their book values, such fair values are separately disclosed in the notes to the financial statements. The
Management believe that the book values of balances due from banks, loans and receivables, held to maturity fixed
income securities, deposits from customers, balances due to banks, issued debt securities approximates their market
values.

u) Cash and Cash Equivalents

For the purpose of presentation in the statement of cash flows, cash and cash equivalents are defined as the amounts
comprising cash and demand deposits with central banks and other credit institutions less demand deposits due to
other credit institutions.

v) Offsetting

Financial assets and liabilities are offset and the net amount is reported in the balance sheet when there is a legally
enforceable right to set off the recognized amounts and there is an intention to settle on a net basis, or to realize the
asset and settle the liability simultaneously.

w) Use of estimates in the preparation of financial statements

The preparation of financial statements in conformity with International Financial Reporting Standards, as
published by the International Accounting Standards Board, requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, income and expenses and disclosure of
contingencies. The significant areas of estimation used in the preparation of the accompanying financial statements
relate to depreciation and evaluation of impairment for loan losses, provisions for loan commitments and stand-by
facilities, as well as vacation pay accrual.

Below are presented key assumptions concerning the future and other key sources of estimation uncertainty at the
balance sheet date that has a significant risk of causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year.

The Group regularly reviews its loans and receivables to assess impairment. The Group uses its experienced
judgement to estimate the amount of any impairment loss in cases where a borrower is in financial difficulties and
there are few available historical data relating to similar borrowers. Similarly, the Group estimates changes in future
cash flows based on the observable data indicating that there has been an adverse change in the payment status of
borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group.
Management uses estimates based on historical loss experience for assets with credit risk characteristics and
objective evidence of impairment similar to those in the group of loans and receivables when scheduling its future
cash flows. The Group uses its experienced judgement to adjust observable data for a group of loans or receivables
to reflect current circumstances.

F-16
F-16
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



25
Employee entitlements to regular vacations are recognised when they accrue to employees. A provision is made for
the estimated liability of employee vacation pay based on unused vacations by employees up to the balance sheet
date.

Future events may occur which will cause the assumptions used in arriving at the estimates to change. The effect of
any changes in estimates will be recorded in the financial statements, when determinable.

x) Subsequent events

Post-year-end events that provide additional information about the Bank’s position at the balance sheet date
(adjusting events) are reflected in the financial statements. Post-year-end events that are not adjusting events are
disclosed in the notes when material.

NOTE 3. SUMMARY OF FINANCIAL RISK MANAGEMENT POLICIES

In the ordinary course of business, the Group is exposed to various financial risks. Those financial risks include
mainly credit risk, market risk and liquidity risk. In order to manage the above risks, the Management of the Group
have approved the risk management policies which are briefly summarised below.

a) Credit risk

Credit risk relates to uncertainty in a counterparty’s ability or willingness to meet its contractual obligations, thus
causing financial loss for the entities within the Group. The Group manages the level of credit risk it undertakes by
establishing limits per individual counterparty, or groups of counterparties with similar characteristics, as well as for
geographical segments, taking into consideration the time duration of such limits. The adequacy of limits is
monitored by the Bank’s Risk Management Committee on a regular basis. Daily monitoring of compliance with
established limits is carried out by the Bank’s Back Office Department. The Group’s exposure to credit risk is
further reduced by obtaining adequate collaterals and guarantees, as well as by exercising rigorous monitoring
procedures of the financial viability of counterparties throughout the contractual relationship.

The Group’s maximum exposure to credit risk is represented by the carrying amount of each financial asset,
including derivative financial instruments, in the balance sheet. Analysis of the Group’s credit exposures is
presented in Notes 13, 14, 17, 30 and 33.

b) Market risk

Market risk is the financial risk of uncertainty in the future market value of a portfolio of assets and/or liabilities due
to changes in interest rates, foreign exchange rates and price of commodities or equity instruments. The Group is
mainly exposed to changes in interest rates and foreign exchange rates.

The Group’s exposure to interest rate risk is managed on a daily basis by the Bank’s Treasury Department and is
monitored on a regular basis by the Assets and Liabilities Management Committee. Tools used by the Treasury
Department and the Committee include gap analysis, duration analysis and sensitivity analysis. Based on such
analyses, the Group’s cost of funds and market situation, the Committee sets benchmark rates for lending to
customers and accepting of deposits from customers, as well as provides guidelines for the management of the
Bank’s investment portfolio and use of derivative financial instruments. The interest rate repricing analysis of the
Group’s assets and liabilities is presented in Note 35.

The Group’s exposure to foreign exchange rate fluctuations is also managed by the Treasury Department and the
Assets and Liabilities Management Committee. The Committee determines limits for open positions in individual
currencies as well as for total open positions. The Group’s exposure to foreign currency risk is presented in
Note 36.

As deemed necessary, the Group’s exposure to market risks is further reduced by utilising derivative financial
instruments.

F-17
F-17
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



26
c) Liquidity risk

Liquidity risk relates to the ability of the Group to meet its financial obligations when they fall due without
incurring substantial losses. The liquidity risk is managed by stringent monitoring and planning of the movements
in the balances of demand deposits with banks and cash on hand, and by allocation of a predetermined proportion of
the Group’s assets in highly liquid financial instruments and short-term deposits. Such proportion is determined
based on the analysis of the maturities of the Bank’s contractual obligations, including outstanding liabilities and
commitments as well as based on the potential calls for withdrawal of funds from current accounts, overnight
deposits, loans and credit lines granted as well as under guarantees issued by the Group. The Group’s assets and
liabilities as well as memorandum items by their remaining contractual maturities are presented in Note 34.
F-18
F-18
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



27

NOTE 4. INTEREST INCOME AND EXPENSE

LVL 000’s
2005 2005 2004 2004
Group Bank Group Bank
Interest income:
- interest on balances due from credit
institutions and central banks 5,776 6,082 3,555 4,159
- interest on loans and advances to customers 51,636 45,962 36,997 32,995
- interest on fixed income securities 19,711 18,695 17,708 16,684
- interest on other financial instruments 1,776 1,776 258 258
Total interest income 78,899 72,515 58,518 54,096

Interest expense:
- interest on balances due to credit institutions
and central banks (4,875) (5,098) (2,784) (2,610)
- interest on deposits from customers (24,141) (23,074) (15,234) (14,713)
- interest on issued debt securities (1,914) (1,914) - -
- interest on other financial instruments (1,495) (1,495) (1,830) (1,830)
Total interest expense (32,425) (31,581) (19,848) (19,153)

Net interest income 46,474 40,934 38,670 34,943


NOTE 5. COMMISSION AND FEE INCOME AND EXPENSE

LVL 000’s
2005 2005 2004 2004
Group Bank Group Bank
Commission and fee income:
- transactions with settlement cards 11,094 10,873 8,915 8,643
- payment transfer fee 9,548 8,352 8,227 7,489
- review of loan applications and collateral
evaluation 3,124 2,941 2,047 1,991
- financial consulting fees * 2,894 2,894 - -
- securities 2,497 2,172 1,628 1,020
- cash disbursement/ transaction commission 1,089 930 1,084 924
- service fee for account maintenance 915 886 814 790
- letters of credit and guarantees 669 611 447 447
- cash collection 393 390 309 308
- other 305 - 426 -
Total commission and fee income 32,528 30,049 23,897 21,612

Commission and fee expense:
- fees related to settlement card operations (3,620) (3,381) (2,548) (2,361)
- fees related to correspondent accounts (2,146) (1,956) (1,956) (1,815)
- brokerage and custodian fees (1,028) (1,721) (570) (922)
Total commission and fee expense (6,794) (7,058) (5,074) (5,098)

Net commission and fee income 25,734 22,991 18,823 16,514

* Financial consulting fees comprise fees received by the Bank for assistance in arranging a third party financing
transaction.
F-19 F-19
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



28

NOTE 6. PROFIT ON TRADING WITH FINANCIAL INSTRUMENTS, NET

LVL 000’s
2005 2005 2004 2004
Group Bank Group Bank

Profit from trading and revaluation of securities
held for trading purposes 3,572 3,505 1,481 1,403
Profit from disposal of available for sale
securities 4,284 4,112 5,611 5,170
Profit from foreign exchange trading and
revaluation of open positions 8,682 7,270 6,516 5,998
(Loss) from trading and revaluation of other
financial instruments (1,054) (1,054) (381) (381)
Profit on trading with financial instruments,
net 15,484 13,833 13,227 12,190


NOTE 7. OTHER OPERATING INCOME

LVL 000’s
2005 2005 2004 2004
Group Bank Group Bank

Penalties received 1,137 1,069 1,331 872
Dividends received 233 264 136 136
Safety boxes rental income 52 44 46 40
Other income 713 248 407 239
Total other operating income 2,135 1,625 1,920 1,287


NOTE 8. ADMINISTRATIVE EXPENSE

LVL 000’s
2005 2005 2004 2004
Group Bank Group Bank

Personnel expense 24,838 21,298 20,660 17,803
Advertising, marketing and sponsorship 4,409 4,156 3,213 3,040
Travel and representation 4,331 4,259 3,041 2,981
Repairs and maintenance 3,258 3,045 2,588 2,455
Communications (telephone, telex, mail) 1,759 1,564 1,762 1,568
Non-refundable value added tax 1,674 1,661 1,214 1,026
Rent for premises 1,559 1,360 1,000 853
EDP maintenance 1,208 963 1,196 973
Consulting and professional fees 1,174 1,017 1,285 1,034
Office expense 672 540 586 530
Representative office expense 241 239 408 408
Security 348 298 365 334
Real estate and other taxes 440 164 276 188
Insurance 108 88 63 59
Other administrative expense 1,703 887 1,143 681
Total administrative expense 47,722 41,539 38,800 33,933


F-20
F-20
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



29
NOTE 9. PERSONNEL EXPENSE

Personnel expense includes remuneration for work to the personnel and related social security contributions and
other short-term benefits costs.

LVL 000’s
2005 2005 2004 2004
Group Bank Group Bank

Remuneration for work 20,545 17,717 17,029 14,761
Social security contributions 4,293 3,581 3,631 3,042
Total personnel expense 24,838 21,298 20,660 17,803

The Chairman of the Board of Directors and the Chairman of the Council of Directors of the Bank have not
received any remuneration in respect of their services to the Bank. The total remuneration paid by the Bank to the
members of the Council and the Board of Directors amounted to LVL 548 (408) thousand.

Personnel expense has been presented in these financial statements within administrative expense.

During the year ended 31 December 2005, the average number of personnel employed by the Group and the Bank
was 2,438 (2,216) and 2,060 (1,914), respectively.


NOTE 10. IMPAIRMENT OF FINANCIAL ASSETS AND CHANGES IN PREVIOUSLY ESTABLISHED
IMPAIRMENT ALLOWANCES

An analysis of the change in allowances for impairment is presented as follows:

LVL 000’s
2005 2005 2004 2004
Group Bank Group Bank

Total allowance at the beginning of the year 34,054 33,029 25,865 25,091

Charge 2,722 2,674 9,109 8,672

Release (5,347) (5,229) (1,010) (715)
Provision charged to the statement of
income, net (2,625) (2,555) 8,099 7,957

Change of allowance due to write-offs, net (9,067) (8,530) 52 (65)
Effect of changes in currency exchange rates 504 504 38 46
Total allowance for impairment at the end of
the year 22,866 22,448 34,054 33,029

The following table provides a specification of the allowance for credit losses (all amounts in LVL 000’s):

31/12/2005 31/12/2004
Group Bank Group Bank

Balances due from credit institutions 2,514 2,514 2,222 2,201
Loans and advances to customers 16,596 16,178 22,894 21,917
Fixed income securities 2,626 2,626 7,094 7,094
Accrued interest income 1,024 1,024 1,657 1,657
Other assets 106 106 131 104
Memorandum items - - 56 56
Total 22,866 22,448 34,054 33,029
F-21 F-21
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



30

NOTE 11. TAXATION

Corporate income tax expense comprises the following items:

LVL 000’s
2005 2005 2004 2004
Group Bank Group Bank

Current corporate income tax 3,974 3,764 2,207 2,020
Deferred income tax (143) (187) (203) (202)
Tax withheld abroad 534 534 210 210
Prior year adjustments - - (8) (8)
Total corporate income tax expense 4,365 4,111 2,206 2,020

The reconciliation of the Bank’s and the Group’s pre-tax profit for the year to the corporate income tax expense for
the year may be specified as follows:

LVL 000’s
2005 2005 2004 2004
Group Bank Group Bank

Profit before corporate income tax 37,579 34,286 18,660 17,124
(Profit)/ loss from investments in subsidiaries - - 419 -
Adjusted profit before corporate income tax 37,579 34,286 19,079 17,124
Corporate income tax (at standard rate) * 5,637 5,143 2,862 2,569

Non-temporary differences, net (237) 3 (49) 58
Prior year adjustments - - (8) (8)
Tax reductions (donations and other
deductions) (1,035) (1,035) (599) (599)
Total corporate income tax expense 4,365 4,111 2,206 2,020

* standard rate for the year ended 31 December 2005 was 15% (2004: 15%).

The movements in deferred corporate income tax liability can be specified as follows:

LVL 000’s
2005 2005 2004 2004
Group Bank Group Bank

As at 1 January 905 901 766 761
Charge to statement of income (143) (187) (203) (202)
Charge to equity (154) (147) 342 342
Total deferred income tax liability at the
end of the year 608 567 905 901

F-22 F-22
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



31

Deferred corporate income tax assets and liabilities can be specified as follows:

LVL 000’s
2005 2005 2004 2004
Group Bank Group Bank

Deferred tax liabilities:
Accumulated excess of tax depreciation
over accounting depreciation 1,249 1,208 1,287 1,283
Revaluation of securities and derivatives 600 564 501 501

Deferred tax assets:
Collective impairment allowance (1,067) (1,067) (769) (769)
Employee vacation pay accrual (174) (138) (114) (114)
Total deferred corporate income tax
liability 608 567 905 901

The movements in tax accounts of the Bank during 2005 can be specified as follows (all amounts in LVL 000’s):

Balance as at
31/12/2004
Calculated
in 2005
Paid
in 2005
Balance as at
31/12/2005

Corporate income tax 657 (3,764) 2,357 (750)
Corporate income tax withheld abroad - (534) 534 -
Social security contributions - (4,735) 4,735 -
Personal income tax - (3,583) 3,583 -
VAT 210 306 - 516
Real estate tax - (155) 155 -
Total tax receivable/ (payable) 867 (12,465) 11,364 (234)


NOTE 12. CASH AND DEPOSITS WITH CENTRAL BANKS

LVL 000’s
31/12/2005 31/12/2005 31/12/2004 31/12/2004
Group Bank Group Bank

Cash 36,891 34,660 31,103 28,918
Deposits with the Bank of Latvia 99,271 99,271 34,346 34,346
Demand deposits with other central banks 7,917 2,904 5,332 484
Total cash and deposits with central banks 144,079 136,835 70,781 63,748

According to the resolution of the Council of the Bank of Latvia, credit institutions should comply with the
compulsory reserve requirement calculated on the basis of attracted deposits. This compulsory reserve must be
exceeded by a credit institution’s average monthly LVL balance on its correspondent account with the Bank of
Latvia. During the reporting year, the Bank was in compliance with these requirements of the Bank of Latvia.

F-23 F-23
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



32

NOTE 13. BALANCES DUE FROM CREDIT INSTITUTIONS

LVL 000’s
31/12/2005 31/12/2005 31/12/2004 31/12/2004
Group Bank Group Bank

Due from credit institutions registered in
OECD countries 194,791 192,707 202,757 194,322
Due from credit institutions registered in
Latvia 31,468 27,992 24,917 23,021
Due from credit institutions registered in other
non-OECD countries 88,838 93,783 87,418 105,117
Total gross balances due from credit
institutions 315,097 314,482 315,092 322,460
Less impairment allowance (see Note 10) (2,514) (2,514) (2,222) (2,201)
Total net balances due from credit
institutions 312,583 311,968 312,870 320,259

As at 31 December 2005, the Bank had inter-bank deposits with 7 Latvian credit institutions and 7 OECD region
credit institutions. Corresponding balances comprised 100% and 85% of total balances due from credit institutions
registered in Latvia and OECD, respectively.

The Bank’s balances with its subsidiary Parex Bankas (Lithuania) accounted for 10% (23%) of the total balances
due from credit institutions registered in other non-OECD countries.

LVL 000’s
31/12/2005 31/12/2005 31/12/2004 31/12/2004
Group Bank Group Bank

Correspondent accounts 75,849 73,999 62,731 51,400
Overnight deposits 88,465 97,373 69,642 69,640
Total demand deposits 164,314 171,372 132,373 121,040

Term deposits with credit institutions:
due within 1 month 105,886 107,048 162,880 173,796
due within 1-3 months 18,515 8,471 760 2,116
due within 3-6 months 13,561 14,305 8,773 14,821
due within 6-12 months 587 - 401 -
due within 1-5 years 6,443 7,495 5,160 6,790
over 5 years and undated 5,791 5,791 4,745 3,897
Total term deposits 150,783 143,110 182,719 201,420

Total gross balances due from credit
institutions 315,097 314,482 315,092 322,460
Less impairment allowance
(see Note 10) (2,514) (2,514) (2,222) (2,201)
Total net balances due from credit
institutions 312,583 311,968 312,870 320,259

Term deposits, serving as cash collateral, have been classified as “over 5 years and undated”.

As at 31 December 2005, balances due from Latvian and non-OECD credit institutions totalling LVL 19,417
thousand (2004: LVL 39,188 thousand) were classified as zero risk exposures, as collateralised by deposits (see also
Note 26).
F-24 F-24
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



33

NOTE 14. LOANS AND ADVANCES TO CUSTOMERS

LVL 000’s
31/12/2005 31/12/2005 31/12/2004 31/12/2004
Group Bank Group Bank

Regular loans 521,749 446,494 437,541 374,091
Utilised credit lines 192,493 237,162 130,818 164,634
Loans under reverse repurchase agreements 29,777 29,173 22,862 22,782
Total gross loans to customers 744,019 712,829 591,221 561,507

Finance leases (see Note 15) 53,831 13,809 46,338 24,901
Factoring 29,952 29,686 44,237 43,672
Debit balances on settlement cards 21,912 21,305 13,876 13,530
Due from investment and brokerage firms 19,328 19,123 11,951 11,951
Overdraft facilities 26,816 30,384 6,964 6,705
Total other loans and advances 151,839 114,307 123,366 100,759

Total gross loans and advances to
customers 895,858 827,136 714,587 662,266
Less impairment allowance (see Note 10) (16,596) (16,178) (22,894) (21,917)
Total net loans and advances to customers 879,262 810,958 691,693 640,349

As at 31 December 2005, the Bank has issued student loans in the total amount of LVL 4,239 thousand
(2004: LVL 4,712 thousand). Student loans are issued under the initiative of the Ministry of Education of the
Republic of Latvia and the State Treasury. The State Treasury has arranged the necessary funding and fully
assumes all risks and rewards incident to these loans. Since the Bank only acts as an agent on behalf of the Ministry
of Education and State Treasury, the outstanding balances of the aforementioned loans and the corresponding
deposits are not included in the Bank’s balance sheet.

As at 31 December 2005, loans and advances totalling LVL 21,064 thousand (2004: LVL 20,753 thousand) or 2.4%
(2004: 3%) of the Group’s and the Bank’s total portfolio of net loans and advances to customers were classified as
zero risk, as collateralised by deposits (see Notes 26 and 27).

The Latvian banking legislation requires that any credit exposure to a non-related entity may not exceed 25% of
equity as defined by the Financial and Capital Market Commission (FCMC) (see Note 33) and the total credit
exposure to all related parties, except for consolidated subsidiaries, may not exceed 15% of equity as defined by the
FCMC. As at 31 December 2005, the Bank was in compliance with the above requirements.

F-25
F-25
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



34

The table below provides the division of outstanding loans and advances to customers by maturity profile.

LVL 000’s
31/12/2005 31/12/2005 31/12/2004 31/12/2004
Group Bank Group Bank

Overdue 9,752 9,416 9,812 9,335
Falling due within:
1 month 76,001 72,860 36,704 34,387
1 - 3 months 33,180 31,656 27,364 23,835
3 - 6 months 23,187 20,658 28,850 24,129
6 - 12 months 69,394 60,280 29,021 19,635
1 - 5 years 312,817 297,225 251,821 216,159
more than 5 years 371,527 335,041 331,015 334,786
Total gross loans and advances to
customers 895,858 827,136 714,587 662,266
Less impairment allowance (see Note 10) (16,596) (16,178) (22,894) (21,917)
Total net loans and advances to customers 879,262 810,958 691,693 640,349

Currently, the Bank’s information system does not provide an analysis of outstanding loans and advances to
customers by their remaining maturities considering the scheduled repayments during the period of loans. Due to
extensive effort required in preparation of such an analysis, the Management did not deem presentation of such
analysis in these financial statements practical. Accordingly, the above table has been prepared under the
assumption that all principal falls due at the final maturity date.

Loans and advances by customer profile may be specified as follows:

LVL 000’s
31/12/2005 31/12/2005 31/12/2004 31/12/2004
Group Bank Group Bank

Government 1,542 634 - -
Local municipalities 4,683 3,400 5,145 3,409
State owned enterprises 13,260 9,298 23,431 22,426
Municipality owned enterprises 18,878 17,326 29,029 29,029
Privately held companies 558,298 534,216 451,845 438,393
Total gross loans and advances to
corporate customers 596,661 564,874 509,450 493,257

Public and religious institutions 14,073 13,851 14,562 14,440
Private individuals 285,124 248,411 190,575 154,569
Total gross loans and advances to
customers 895,858 827,136 714,587 662,266
Less impairment allowance (see Note 10) (16,596) (16,178) (22,894) (21,917)
Total net loans and advances to customers 879,262 810,958 691,693 640,349

F-26
F-26
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



35

An industry analysis of the gross portfolio of loans and advances to corporate customers before provision for
possible credit losses may be specified as follows:

LVL 000’s
31/12/2005 31/12/2005 31/12/2004 31/12/2004
Group Bank Group Bank

Transport and communications 176,034 156,893 174,312 158,034
Real estate management 113,802 104,364 75,896 65,156
Trade 78,846 50,700 56,173 47,812
Manufacturing 55,985 53,414 45,160 43,828
Financial intermediation 43,752 90,391 42,038 77,348
Electricity, gas and water supply 42,930 42,601 35,900 35,536
Construction 27,725 22,489 29,780 24,800
Hotels, restaurants and entertainment 21,822 19,018 15,030 11,874
Agriculture and forestry 2,323 1,776 4,349 4,013
Other industries 33,442 23,228 30,812 24,856
Total gross loans and advances to
corporate customers 596,661 564,874 509,450 493,257

The following table represents geographical profile of the portfolio of loans and advances to customers analysed by
the place of customers’ reported residence:

LVL 000’s
31/12/2005 31/12/2005 31/12/2004 31/12/2004
Group Bank Group Bank

OECD region residents 108,594 98,100 89,183 85,686
Latvian residents 510,945 515,428 416,987 417,603
Non-OECD region residents 276,319 213,608 208,417 158,977
Total gross loans and advances to
customers 895,858 827,136 714,587 662,266
Less impairment allowance (see Note 10) (16,596) (16,178) (22,894) (21,917)
Total net loans and advances to customers 879,262 810,958 691,693 640,349


NOTE 15. FINANCE LEASES BY TYPE OF ASSETS

LVL 000’s
31/12/2005 31/12/2005 31/12/2004 31/12/2004
Group Bank Group Bank

Transport vehicles 40,568 5,799 27,242 13,254
Real estate 6,378 6,159 8,577 8,577
Manufacturing equipment 4,183 315 942 942
Other 2,702 1,536 9,577 2,128
Total present value of finance lease
payments

53,831

13,809

46,338

24,901

F-27
F-27
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



36

NOTE 16. UNEARNED INTEREST INCOME ON FINANCE LEASES

LVL 000’s
31/12/2005 31/12/2005 31/12/2004 31/12/2004
Group Bank Group Bank

Short-term unearned income 4,180 793 1,822 1,137
Long-term unearned income 4,518 1,113 3,248 1,950
Total unearned interest income on finance
leases 8,698 1,906 5,070 3,087


NOTE 17. FIXED INCOME SECURITIES

LVL 000’s
31/12/2004 31/12/2005 31/12/2004 31/12/2004
Group Bank Group Bank

Government bonds 67,407 65,817 67,688 61,671
Municipality bonds 15,945 13,801 15,676 15,324
Credit institution bonds 203,851 199,113 120,173 115,352
Corporate bonds 102,703 93,382 82,082 68,636
Other financial institution bonds 37,161 34,583 9,661 9,661
Managed funds 7,620 7,620 10,572 10,572
Total gross fixed income securities 434,687 414,316 305,852 281,216
Less impairment allowance (see Note 10) (2,626) (2,626) (7,094) (7,094)
Total net fixed income securities 432,061 411,690 298,758 274,122

Managed funds represent the Group’s share in certain portfolios of fixed income securities that are managed on
behalf of investors by financial institutions registered in OECD countries. The Group does not possess detailed
information on these investments, therefore they are not analysed by their ultimate issuer.

Fixed income securities held by the Group and the Bank are classified between held to maturity, available for sale
and fair value through profit and loss (where all financial assets are held for trading) portfolio as follows:

LVL 000’s
31/12/2005 31/12/2005 31/12/2004 31/12/2004
Group Bank Group Bank

Held for trading 24,178 23,571 17,850 17,743
Available for sale 342,469 339,973 245,328 223,213
Held to maturity 68,040 50,772 42,674 40,260
Total gross fixed income securities 434,687 414,316 305,852 281,216
Less impairment allowance (see Note 10) (2,626) (2,626) (7,094) (7,094)
Total net fixed income securities 432,061 411,690 298,758 274,122
F-28
F-28
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



37

The Group’s fixed income securities are further split as follows (all amounts in LVL 000’s):

31/12/2005 31/12/2004
Held to
maturity
Available
for sale
Held for
trading
Total in
LVL 000’s
Held to
maturity
Available
for sale
Held for
trading
Total in
LVL 000’s

Government bonds 120 59,747 7,540 67,407 128 64,470 3,090 67,688
Municipality bonds 2,144 13,801 - 15,945 352 15,211 113 15,676
Credit institution bonds 39,233 163,160 1,458 203,851 32,935 85,777 1,461 120,173
Corporate bonds 16,345 71,178 15,180 102,703 2,224 66,814 13,044 82,082
Other financial
institution bonds 2,578 34,583 - 37,161 - 9,519 142 9,661
Managed funds 7,620 - - 7,620 7,035 3,537 - 10,572
Total gross fixed
income securities 68,040 342,469 24,178 434,687 42,674 245,328 17,850 305,852

The Group’s investments in fixed income securities are analysed by listed and unlisted securities as follows (all
amounts in LVL 000’s):

31/12/2005 31/12/2004
Listed Unlisted Total Listed Unlisted Total

Government bonds:
Latvia 41,830 - 41,830 39,816 - 39,816
OECD 1,531 - 1,531 5,158 - 5,158
Non-OECD 24,046 - 24,046 22,714 - 22,714
Total government bonds 67,407 - 67,407 67,688 - 67,688
Municipality bonds:
OECD - - - - - -
Non-OECD 15,945 - 15,945 15,674 2 15,676
Total municipality bonds 15,945 - 15,945 15,674 2 15,676
Credit institution bonds:
Latvia 5,254 - 5,254 1,935 - 1,935
OECD 103,733 31,425 135,158 33,012 45,194 78,206
Non-OECD 35,480 27,959 63,439 20,417 19,615 40,032
Total credit institution bonds 144,467 59,384 203,851 55,364 64,809 120,173

Corporate bonds (OECD and non-
OECD) 101,325 1,378 102,703 56,843 25,239 82,082

Other financial institution bonds
(OECD) 36,041 1,120 37,161 9,452 209 9,661

Managed funds - 7,620 7,620 - 10,572 10,572
Total gross fixed income securities 365,185 69,502 434,687 205,021 100,831 305,852
Less impairment allowance
(see Note 10) - (2,626) (2,626) (1,745) (5,349) (7,094)
Total net fixed income securities 365,185 66,876 432,061 203,276 95,482 298,758

F-29
F-29
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



38

NOTE 18. FIXED INCOME SECURITIES BY MATURITY PROFILE

The following table provides a maturity profile of the Group’s fixed income securities as at 31 December 2005 (all
amounts in LVL 000’s):


Within
1 month

1-3
months

3-6
months

6-12
months

1-5
years
More
than
5 years

Total
portfolio

Government bonds 944 55 311 141 6,964 58,992 67,407
Municipality bonds - - - - 6,384 9,561 15,945
Credit institution bonds - 629 - 888 120,729 81,605 203,851
Corporate bonds - 1,731 309 897 43,389 56,377 102,703
Other financial institution
bonds - - - - 27,010 10,151 37,161
Managed funds - - - - 4,715 2,905 7,620
Total gross fixed income
securities 944 2,415 620 1,926 209,191 219,591 434,687


NOTE 19. SHARES AND OTHER NON-FIXED INCOME SECURITIES

LVL 000’s
31/12/2005 31/12/2005 31/12/2004 31/12/2004
Group Bank Group Bank

Latvian entities’ equity shares:
listed 1,188 1,188 900 900
unlisted 468 39 45 39
Total Latvian entities’ equity shares 1,656 1,227 945 939
Foreign entities’ equity shares:
listed 13,003 12,158 3,182 3,166
unlisted 607 591 107 93
Total foreign entities’ equity shares 13,610 12,749 3,289 3,259

Managed funds 15,201 15,128 7,278 7,231
Total shares and other non-fixed income
securities 30,467 29,104 11,512 11,429

Investments in managed funds, where the Group does not possess sufficient information on portfolios’ composition
between fixed income securities and shares are classified as investments in shares and other non-fixed income
securities.
F-30 F-30
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



39

The following table provides the classification of the Group's shares and other non-fixed income securities between
available for sale and fair value through profit and loss (where all shares are held for trading) portfolio (all amounts
in LVL 000’s):

31/12/2005 31/12/2004
Available
for sale
Held for
trading

Total
Available
for sale
Held for
trading

Total

Equity shares:
in Latvian financial institutions - 429 429 - 945 945
in Latvian corporate entities - 1,227 1,227 - 509 509
in OECD financial entities 58 - 58
in OECD corporate entities 14 6,503 6,517 67 737 804
in non-OECD credit institutions 1 705 706 - 133 133
in non-OECD corporate entities - 6,329 6,329 - 1,843 1,843
Total equity shares 73 15,193 15,266 67 4,167 4,234

Managed funds 73 15,128 15,201 - 7,278 7,278
Total shares and other non-fixed
income securities 146 30,321 30,467 67 11,445 11,512

Due to the fact that the Group does not possess a detailed enough specification of investments under managed
funds, which are managed on the behalf of investors by financial institutions registered in OECD area, such
investments are not analysed by their ultimate issuer.


NOTE 20. INVESTMENTS IN SUBSIDIARIES

The Bank’s investments in subsidiaries are accounted in the Bank’s separate financial statements under the cost
method. Movements in the Bank’s investments in subsidiaries may be specified as follows:

LVL 000’s
2005 2004

Balance as at 1 January (as earlier reported) - 8,248

Effect of adoption of revised standards (Note 2) - 134

Balance as at 1 January (adjusted – note 2) 18,559 8,382

Acquisitions and investments 2,988 10,177

Balance as at 31 December 21,547 18,559

In 2005, Parex Group entities Parex Asset Management and Parex ieguldƯjumu pƗrvaldes sabiedrƯba were merged
into one entity – IPAS Parex Asset Management (PAM). The share capital of PAM was increased by LVL 2,306
thousand. The funding was used mostly for establishing two 100% owned subsidiaries – AS Parex Dziviba and
SIA E&P Baltic Properties. As such, AS Parex Dziviba and SIA E&P Baltic Properties are 100% indirectly owned
by the Bank. The key operations of AS Parex Dziviba will be providing life insurance services. However, till the
end of year 2005 no operations had been carried out by AS Parex Dziviba.

During 2005, the Bank established/ acquired several leasing companies in CIS countries – Parex Leasing ("ɉɚɪɟɤɫ
Ʌɢɡɢɧɝ") (Moscow, Russia); Extroleasing ("ɗɤɫɬɪɨɥɢɡɢɧɝ") (Moscow, Russia); Ekspress leasing ("ɗɤɫɩɪɟɫɫ
ɥɢɡɢɧɝ") (St. Petersburg, Russia), Lasca Leasing ("Ʌɚɫɤɚ Ʌɿɡɢɧɝ") (Kiev, Ukraine), Parex Leasing ("ɉɚɪɟɤɫ
Ʌɢɡɢɧɝ") (Minsk, Belarus), Parex Leasing and Factoring ("ɉɚɪɟɤɫ Ʌɢɡɢɧɝ ɷɧɞ Ɏɚɤɬɨɪɢɧɝ") (Baku, Azerbaijan).
The total amount of investment amounted to LVL 482 thousand, which as at respective acquisition date
approximated the fair value of the net assets acquired.
F-31
F-31
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



40

As at 31 December 2005 and 2004, the Bank held the following investments in subsidiaries:

As at 31/12/2005
Company

Country of
registration



Business profile
Share
capital in
LVL 000’s
The
Bank’s
share (%)

% of total
voting
rights
Investment
acquisition
value in
LVL 000’s
31/12/2005
Investment
acquisition
value in
LVL 000’s
31/12/2004

AB Parex Bankas Lithuania Banking 6,324 100.0 100.0 4,981 4,981
AP Anlage & Privatbank AG Switzerland Banking 4,472 100.0 100.0 9,677 9,677
AS Parex atklƗtais pensiju fonds Latvia Pension fund 450 99.6 99.6 451 451
IPAS Parex Asset Management Latvia Finance 4,150 100.0 100.0 4,151 1,845
Parex Asset Management Russia Finance 618 100.0 100.0 - -
Parex Asset Management Ukraine Finance 525 100.0 100.0 - -
UAB Parex Investiciju valdymas Lithuania Finance 449 100.0 100.0 287 287
OU Parex Leasing & Factoring Estonia Finance 351 100.0 100.0 313 313
UAB Parex Faktoringas ir Lizingas Lithuania Finance 306 100.0 100.0 282 282
SIA Parex brokeru sistƝma Latvia
Custom brokerage
services 120 91.7 91.7 110 110
UAB Parex brokeriu sistema Lietuva
Custom brokerage
services 2 91.7 91.7 - -
Regalite Holdings Ltd. Cyprus Finance 6 100.0 100.0 - -
Calenia Investments Limited Cyprus Finance 1 100.0 100.0 - -
SIA Parex Express KredƯts Latvia Leasing 31 100.0 100.0 613 613
SIA E & P Baltic Properties Latvia Finance 20 100.0 100.0 - -
SIA Parex lƯzings un faktorings Latvija Leasing 200 100.0 100.0 200 -
AS Parex DzƯvƯba Latvia Life insurance 2,500 100.0 100.0 - -
OOO Laska Lizing Ukraine Leasing 7 100.0 100.0 6 -
OOO Ekspress Lizing Russia Leasing 72 100.0 100.0 76 -
OOO Pareks Lizing and Faktoring Azerbaijan Leasing 31 100.0 100.0 26 -
OOO Pareks Lizing Russia Leasing 143 100.0 100.0 141 -
IOOO Pareks Lizing Byelorussia Leasing 12 100.0 100.0 11 -
OOO Ekstrolizing Russia Leasing - 100.0 100.0 222 -
Parex Global Opportunities Fund
Netherlands
Antilles Finance - 100.0 100.0 - -
Parex Group Representation Ltd.
United
Kingdom
Representative
office - 100.0 100.0 - -
UAB Parex Lizingas Lithuania Leasing 765 51.0 - -

Total investments in subsidiaries 21,547 18,559

The financial statements of AS Parex banka and its subsidiaries, except for UAB Parex Lizingas, are consolidated in
the Group’s financial statements on a line by line basis by adding together like items of assets and liabilities as well
as income and expenses.

The Group’s loss from subsidiaries in 2004 in the amount of LVL 419 thousand represents a write-off of the
investment in unconsolidated subsidiary UAB Parex Lizingas. Any outstanding receivable balances from the
aforementioned entity have been 100% provided for as at 31 December 2004. There has been no movement in
respect to the investment and receivable outstanding balances during 2005.

F-32 F-32
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



41
NOTE 21. INTANGIBLE ASSETS

LVL 000’s
31/12/2005 31/12/2005 31/12/2004 31/12/2004
Group Bank Group Bank

Goodwill from acquisition of subsidiaries:
AP Anlage & Privatbank AG 1,246 - 1,246 -
AB Parex Bankas 35 - 35 -
SIA Parex LƯzings 123 - 123 -
1,404 - 1,404 -

Software 1,359 1,218 1,994 1,817
Other intangible assets 10 2 15 14

Total intangible assets excluding prepayments 2,773 1,220 3,413 1,831
Prepayments for intangible assets 32 3 84 83
Total net book value of intangible assets 2,805 1,223 3,497 1,914

Movements in the Group’s intangible assets excluding prepayments for the year ended 31 December 2005 can be
specified as follows (all amounts in LVL 000’s):


Goodwill
from acquisition of
subsidiaries Software
Other
intangible
assets
Total intangible
assets excluding
prepayments

Historical cost
As at 1 January 2005 2,552 5,590 37 8,179
Additions - 500 3 503
Disposals - - (3) (3)
As at 31 December 2005 2,552 6,090 37 8,679

Accumulated amortisation
As at 1 January 2005 1,148 3,596 22 4,766
Charge for the year - 1,135 7 1,142
Reversal due to disposals - - (2) (2)
As at 31 December 2005 1,148 4,731 27 5,906

Net book value
As at 1 January 2005 1,404 1,994 15 3,413
As at 31 December 2005 1,404 1,359 10 2,773

NOTE 22. FIXED ASSETS

LVL 000’s
31/12/2005 31/12/2005 31/12/2004 31/12/2004
Group Bank Group Bank

Leasehold improvements 1,797 1,796 1,787 1,787
Land and buildings 12,055 9,507 10,875 8,276
Transport vehicles 2,795 2,370 2,524 2,230
Other fixed assets 7,000 6,004 7,751 6,946

Total fixed assets excluding prepayments 23,647 19,677 22,937 19,239
Prepayments for fixed assets 124 111 232 213
Total net book value of fixed assets 23,771 19,788 23,169 19,452

F-33 F-33
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



42
The following changes in the Group’s fixed assets excluding prepayments for fixed assets took place during the
year ended 31 December 2005 (all amounts in LVL 000’s):



Leasehold
Improvements


Land and
buildings


Transport
vehicles

Other
fixed
assets
Total
fixed assets
excluding
prepayments

Historical cost
As at 1 January 2005 2,855 12,390 4,797 24,641 44,683
Additions 1,128 1,531 1,407 2,919 6,985
Disposals (921) (134) (562) (1,019) (2,636)
As at 31 December 2005 3,062 13,787 5,642 26,541 49,032

Accumulated depreciation
As at 1 January 2005 1,068 1,515 2,273 16,890 21,746
Charge for the year 490 218 878 3,619 5,205
Reversal due to disposals (293) (1) (304) (968) (1,566)
As at 31 December 2005 1,265 1,732 2,847 19,541 25,385

Net book value
As at 1 January 2005 1,787 10,875 2,524 7,751 22,937
As at 31 December 2005 1,797 12,055 2,795 7,000 23,647

The following changes in the Group’s fixed assets excluding prepayments for fixed assets took place during the
year ended 31 December 2004 (all amounts in LVL 000’s):



Leasehold
Improvements


Land and
buildings


Transport
vehicles

Other
fixed
assets
Total
fixed assets
excluding
prepayments

Historical cost
As at 1 January 2004 1,931 12,257 4,423 21,693 40,304
Additions 924 309 965 3,264 5,462
Disposals - (176) (591) (316) (1,083)
As at 31 December 2004 2,855 12,390 4,797 24,641 44,683

Accumulated depreciation
As at 1 January 2004 623 1,301 2,098 13,553 17,575
Charge for the year 445 217 719 3,644 5,025
Reversal due to disposals - (3) (544) (307) (854)
As at 31 December 2004 1,068 1,515 2,273 16,890 21,746

Net book value
As at 1 January 2004 1,308 10,956 2,325 8,140 22,729
As at 31 December 2004 1,787 10,875 2,524 7,751 22,937

F-34
F-34
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



43
The following changes in the Bank’s fixed assets excluding prepayments for fixed assets took place during the year
ended 31 December 2005 (all amounts in LVL 000’s):



Leasehold
Improvements


Land and
buildings


Transport
vehicles

Other
fixed
assets
Total
fixed assets
excluding
prepayments

Historical cost
As at 1 January 2005 2,855 9,645 4,382 22,711 39,593
Additions 1,127 1,539 1,171 2,337 6,174
Disposals (921) (134) (507) (835) (2,397)
As at 31 December 2005 3,061 11,050 5,046 24,213 43,370

Accumulated depreciation
As at 1 January 2005 1,068 1,369 2,152 15,765 20,354
Charge for the year 490 175 788 3,272 4,725
Reversal due to disposals (293) (1) (264) (828) (1,386)
As at 31 December 2005 1,265 1,543 2,676 18,209 23,693

Net book value
As at 1 January 2005 1,787 8,276 2,230 6,946 19,239
As at 31 December 2005 1,796 9,507 2,370 6,004 19,677


The following changes in the Bank’s fixed assets excluding prepayments for fixed assets took place during the year
ended 31 December 2004 (all amounts in LVL 000’s):



Leasehold
Improvements


Land and
buildings


Transport
vehicles

Other
fixed
assets
Total
fixed assets
excluding
prepayments

Historical cost
As at 1 January 2004 1,931 9,510 4,185 19,892 35,518
Additions 924 311 788 3,020 5,043
Disposals - (176) (591) (201) (968)
As at 31 December 2004 2,855 9,645 4,382 22,711 39,593

Accumulated depreciation
As at 1 January 2004 623 1,195 2,013 12,657 16,488
Charge for the year 445 177 683 3,307 4,612
Reversal due to disposals - (3) (544) (199) (746)
As at 31 December 2004 1,068 1,369 2,152 15,765 20,354

Net book value
As at 1 January 2004 1,308 8,315 2,172 7,235 19,030
As at 31 December 2004 1,787 8,276 2,230 6,946 19,239


F-35
F-35
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



44
NOTE 23. PREPAYMENTS AND ACCRUED INCOME

LVL 000’s
31/12/2005 31/12/2005 31/12/2004 31/12/2004
Group Bank Group Bank

Accrued interest income 6,671 6,604 6,547 6,237
Prepayments 4,186 3,609 3,298 3,280
Other accrued income 507 149 146 146
Total gross prepayments and accrued
income 11,364 10,362 9,991 9,663
Less impairment allowance
(see Note 10) (1,024) (1,024) (1,657) (1,657)
Total prepayments and accrued income 10,340 9,338 8,334 8,006


NOTE 24. OTHER ASSETS

LVL 000’s
31/12/2005 31/12/2005 31/12/2004 31/12/2004
Group Bank Group Bank

Spot exchange contracts 482 482 337 337
Repossessed assets for sale 251 165 223 185
Money in transit 967 765 - -
Other assets 4,810 2,554 1,304 1,115
Total gross other assets 6,510 3,966 1,864 1,637
Less impairment allowance
(see Note 10) (106) (106) (131) (104)
Total net other assets 6,404 3,860 1,733 1,533


NOTE 25. ISSUED DEBT SECURITIES

In March 2005, the Bank issued debt securities in amount of LVL 5 million. The debt matures in March 2008 and
pays fixed interest of 4.25% p.a. Further, in June 2005, the Bank issued Eurobonds in amount of EUR 100 million.
The debt matures in June 2008 and pays fixed interest of 4.375% p.a.

Based on Bank’s policies to keep certain level of its debt at floating rates, the Bank engaged in interest rate swap
transaction, whereby swapped certain part of the fixed coupon payments to EURIBOR. The derivative was
designated as hedge instrument and the effective part of it adjusts the outstanding amount of the issued EUR debt
securities (see also Note 30).

NOTE 26. BALANCES DUE TO CREDIT INSTITUTIONS AND CENTRAL BANKS

LVL 000’s
31/12/2005 31/12/2005 31/12/2004 31/12/2004
Group Bank Group Bank

Due to credit institutions registered in OECD
countries 197,735 188,992 86,077 83,100
Due to credit institutions registered in Latvia 21,031 20,026 25,103 24,804
Due to credit institutions registered in other
non-OECD countries 44,230 49,746 61,070 54,759
Total balances due to credit institutions
and central banks 262,996 258,764 172,250 162,663

F-36 F-36
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



45
The following table presents the Group’s balances due to credit institutions according to maturity profile:

Due to credit institutions registered in: LVL 000’s
OECD
countries

Latvia
Other
countries
Total
31/12/2005
Total
31/12/2004

Balances on demand 1,445 1,514 4,809 7,768 44,514
Overnight deposits - 1,512 285 1,797 6,000
Total balances repayable on demand 1,445 3,026 5,094 9,565 50,514

Loans from credit institutions:
due within 1 month 1,374 16,225 33,202 50,801 33,542
due within 1-3 months 53,917 1,097 4 55,018 3,967
due within 3-6 months 1,778 - - 1,778 360
due within 6-12 months 139,221 406 - 139,627 83,307
due within 1-5 years - 277 5,930 6,207 560
Total loans from credit institutions 196,290 18,005 39,136 253,431 121,736

Total due to credit institutions 197,735 21,031 44,230 262,996 172,250

On 15 February 2005, the Bank received a syndicated loan from Mizuho Corporate Bank Ltd. maturing on
14 February 2006 and bearing an interest rate of 6 month LIBOR plus a margin of 0.65% per annum. On 4 July
2005, the bank received other syndicated loan from ING Bank N.V. maturing on 3 July 2006 and bearing an interest
rate of 6 month LIBOR plus a margin of 0.60% per annum. The outstanding balance of the syndicated loans,
amounting to EUR 181,323 thousand (2004: EUR 117,000 thousand), comprises 96% (2004: 99%) of the Bank’s
total balances due to credit institutions registered in OECD countries as at 31 December 2005.

As at 31 December 2005, the Bank had outstanding balances due to 6 credit institutions registered in Latvia and 9
credit institutions registered in other non-OECD countries. The above deposits comprised 94% and 77% of the total
balances due to credit institutions registered in Latvia and in other non-OECD countries, respectively.

As at 31 December 2005, the Bank held restricted balances due to credit institutions amounting to LVL 18,581
thousand (2004: LVL 42,284 thousand) that are dependent upon the repayment of outstanding balances due from
credit institutions and loans and advances to customers.


NOTE 27. DEPOSITS FROM CUSTOMERS

LVL 000’s
31/12/2005 31/12/2005 31/12/2004 31/12/2004
Group Bank Group Bank

Demand deposits 939,778 894,932 874,764 840,648

Term deposits:
due within 1 month 154,135 146,645 68,691 65,961
due within 1-3 months 34,892 29,062 33,239 29,695
due within 3-6 months 74,087 71,342 45,229 42,605
due within 6-12 months 92,096 87,860 67,164 64,689
due within 1-5 years 21,284 22,167 15,204 13,385
due in more than 5 years 1,652 7 1,280 1,273
Total term deposits 378,146 357,083 230,807 217,608
Total deposits from customers 1,317,924 1,252,015 1,105,571 1,058,256

F-37
F-37
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



46
The following table presents deposits from customers according to customer profile:

LVL 000’s
31/12/2005 31/12/2005 31/12/2004 31/12/2004
Group Bank Group Bank

Government 2,792 1,935 26,523 26,523
Municipalities 8,922 8,650 15,360 15,360
Financial institutions 17,172 18,306 14,769 17,090
State owned enterprises 24,106 23,851 9,547 8,696
Public and religious institutions 6,281 5,963 8,323 7,961
Privately held companies 925,954 881,334 765,346 733,750
Private individuals 332,697 311,976 265,703 248,876
Total deposits from customers 1,317,924 1,252,015 1,105,571 1,058,256

The following table provides the split of deposits from customers by their place of residence.

LVL 000’s
31/12/2005 31/12/2005 31/12/2004 31/12/2004
Group Bank Group Bank

Latvian residents 388,280 392,201 317,763 319,189
Non-residents 929,644 859,814 787,808 739,067
Total deposits from customers 1,317,924 1,252,015 1,105, 571 1,058,256

As at 31 December 2005, the Bank held restricted deposits amounting to LVL 21,111 thousand (2004: LVL 18,390
thousand) that are dependent upon repayment of outstanding balances due from customers.


NOTE 28. OTHER LIABILITIES

LVL 000’s
31/12/2005 31/12/2005 31/12/2004 31/12/2004
Group Bank Group Bank

Suspense liabilities 1,633 1,633 1,502 1,501
Spot exchange contracts 457 457 297 304
Money in transit 9,124 4,169 7,158 3,952
Other liabilities 6,491 1,238 2,691 1,817
Total other liabilities 17,705 7,497 11,648 7,574

Suspense liabilities comprise funds received by the Group and the Bank as at year end, but not transferred to
ultimate beneficiaries due to unclear or incomplete details of the supporting documentation.


NOTE 29. PAID-IN SHARE CAPITAL

As at 31 December 2005, the Bank’s registered and paid-in share capital was LVL 65,027 thousand. In accordance
with the Bank’s statutes, the share capital consists of 60,633 thousand ordinary shares with voting rights and
4,394 thousand ordinary shares without voting rights. All shares have a par value of LVL 1 each and, as at 31
December 2005, they all were issued and fully paid. As at 31 December 2005, the Bank did not possess any of its
own shares.

F-38 F-38
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



47
As at 31 December 2005, the Bank had 65 (69) shareholders. The respective shareholdings as at 31 December 2005
and 2004 may be specified as follows:

31/12/2005 31/12/2004

Paid-in
share
capital
(LVL 000’s)
% of
total
paid-in
capital
% of
total
voting
rights
Paid-in
share
capital
(LVL 000’s)
% of
total
paid-in
capital
% of
total
voting
rights

Valery Kargin 27,887 42.89 45.99 27,887 42.89 45.99
Viktor Krasovitsky 27,887 42.89 45.99 27,887 42.89 45.99
Other 9,253 14.22 8.02 9,253 14.22 8.02

Total 65,027 100.00 100.00 65,027 100.00 100.00


NOTE 30. MEMORANDUM ITEMS

Memorandum items comprise contingent liabilities, financial commitments, foreign exchange contracts and
derivative financial instruments. The following table provides a specification of contingent liabilities and financial
commitments outstanding as at 31 December 2005 and 2004.

LVL 000’s
31/12/2005 31/12/2005 31/12/2004 31/12/2004
Group Bank Group Bank

Contingent liabilities:
Outstanding guarantees 18,503 18,669 21,281 21,269
Outstanding letters of credit 2,612 2,612 4,619 4,619
Total contingent liabilities 21,115 21,281 25,900 25,888

Financial commitments:
Loans granted not fully drawn down 37,797 30,275 26,730 23,193
Unutilised credit lines and overdraft facilities 115,683 129,783 80,495 86,561
Credit card commitments 37,344 37,650 18,065 18,065
Other financial commitments - - 6 6
Financial commitments 190,824 197,708 125,296 127,825

The following table presents the notional amounts and fair values of foreign exchange contracts and derivative
financial instruments. The notional amounts of foreign exchange contracts represent the amounts receivable under
these contracts. The notional amounts of other financial instruments represent the value of the underlying assets.

Notional amount Fair value
LVL 000’s LVL 000’s
31/12/2005 31/12/2004 31/12/2005 31/12/2004
Group Bank Group Bank Group Bank Group Bank

Foreign exchange contracts:
Spot exchange 103,111 125,225 93,019 92,878 (49) (77) 40 33
Forwards 17,616 22,602 182,884 184,011 28 25 (724) (720)
Swaps 582,360 569,574 529,098 539,856 (252) (255) (1,322) (1,329)
Total foreign exchange
contracts 703,087 717,401 805,001 816,745 (273) (307) (2,006) (2,016)

Other financial instruments:
Futures, sold 2,887 2,887 8,242 8,242 (21) (21) (15) (15)
Interest rate swaps 95,098 95,098 17,350 17,350 (1,479) (1,321) 156 156
FRA 7,028 7,028 - - (4) (4) - -
Total other financial
instruments 105,013 105,013 25,592 25,592 (1,504) (1,346) 141 141

F-39
F-39
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



48
The fair value on foreign exchange contracts is presented in balance sheet as follows:

Assets Liabilities
LVL 000’s LVL 000’s
31/12/2005 31/12/2004 31/12/2005 31/12/2004
Group Bank Group Bank Group Bank Group Bank

Other assets 482 482 337 337 (457) (457) (297) (304)
Derivative financial instruments 564 698 1,405 1,414 (2,366) (2,376) (3,310) (3,322)
Total 1,046 1,180 1,742 1,751 (2,823) (2,833) (3,607) (3,626)

The following table represents geographical profile of the Group’s memorandum items based on the customer’s/
counter party’s reported residence as at 31 December 2005:


OECD
countries


Latvia
Other
non-OECD
countries

Total
LVL 000’s

Contingent liabilities:
Outstanding guarantees 3,344 10,029 5,130 18,503
Outstanding letters of credit 1,194 710 708 2,612
Total contingent liabilities 4,538 10,739 5,838 21,115

Financial commitments:
Loans granted not fully drawn down 43 28,512 9,242 37,797
Unutilised credit lines and overdraft facilities 1,724 99,404 14,555 115,683
Credit card commitments 558 35,219 1,567 37,344
Other financial commitments - - - -
Financial commitments 2,325 163,135 25,364 190,824

Foreign exchange contracts:
Spot exchange 56,284 15,411 31,416 103,111
Forwards 10,729 1,582 5,305 17,616
Swaps 268,805 81,365 232,190 582,360
Total foreign exchange contracts 335,818 98,358 268,911 703,087

Futures, sold 2,887 - - 2,887
Interest rate swaps 95,098 - - 95,098
FRA 7,028 - - 7,028
Total other financial instruments 105,013 - - 105,013

Hedging

At 31 December 2005, the Bank had an interest rate swap agreement in place with a notional amount of EUR 100
million whereby it receives a fixed rate of interest of 2.37% and pays a variable rate equal to EURIBOR on the
notional amount. The swap is being used to maintain certain level of the Bank’s total debt at floating rates. The
issued debt securities and interest rate swap have the same critical terms.


F-40
F-40
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



49
NOTE 31. FUNDS UNDER TRUST MANAGEMENT

Under IFRS, funds managed by a trustee on behalf of individuals, trusts and other institutions are not regarded as
assets of the trustee and, therefore, are not included in its balance sheet.

The table below provides analysis of the funds managed on behalf of customers by investment type:

LVL 000’s
31/12/2005 31/12/2005 31/12/2004 31/12/2004
Group Bank Group Bank
Fixed income securities:
Government bonds 22,696 - 7,625 -
Foreign municipality bonds 2,566 - 1,364 30
Credit institution bonds 34,911 175 3,850 -
Corporate bonds 25,211 - 17,717 -
Other financial institution bonds - - 123 -
Managed funds 22,737 - 1,781 22
Total investments in fixed
income securities 108,121 175 32,460 52

Other investments:
Deposits with credit institutions 12,332 - 2,676 -
Loans to corporate entities 1,818 1,818 129,301 129,301
Loans to financial institutions - 596 - 2,064
Real estate 16,898 424 2,295 -
Shares 24,007 - 3,148 412
Other 2,877 - 634 -
Total other investments 57,932 2,838 138,054 131,777
Total assets under trust management
agreements 166,053 3,013 170,514 131,829

The table below provides an analysis of the customer profile on whose behalf the funds are managed:

LVL 000’s
31/12/2005 31/12/2005 31/12/2004 31/12/2004
Group Bank Group Bank

Privately held companies 46,847 1,466 144,475 129,725
Private individuals 34,718 951 11,328 40
Investors of investment funds 64,469 - 12,169 -
Financial institutions 20,019 596 2,542 2,064
Total liabilities under trust management
agreements 166,053 3,013 170,514 131,829


NOTE 32. CASH AND CASH EQUIVALENTS

The table below provides a breakdown of cash and cash equivalents as at 31 December 2005 and 2004:

LVL 000’s
31/12/2005 31/12/2005 31/12/2004 31/12/2004
Group Bank Group Bank

Cash and demand deposits with central banks 144,079 136,835 70,781 63,748
Demand deposits with other credit institutions 164,314 171,372 132,373 121,040
Demand deposits due to other credit institutions (9,565) (14,674) (50,514) (49,745)
Total cash and cash equivalents 298,828 293,533 152,640 135,043


F-41
F-41
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



50
NOTE 33. CAPITAL ADEQUACY

Capital adequacy refers to the sufficiency of the Group’s capital resources to cover the credit risks and market risks
arising from the portfolio of assets and the off-balance sheet exposures.

The Financial and Capital Markets Commission’s , the bank regulator, regulations require Latvian banks to maintain
a capital adequacy ratio based on financial statements prepared under Latvian accounting standards of 8% of risk
weighted assets.

Since the Bank has subsidiaries, which are financial institutions, it should comply with the regulatory requirements
based on both the Group’s financial statements and the Bank’s financial statements as a stand-alone entity. As at
31 December 2005, the Group’s capital adequacy ratio in accordance with the FCMC’s requirements was 11.1%
(2004: 11.9%). At the same time, the Bank’s capital adequacy ratio without taking into account the Bank’s
investments in subsidiaries and calculated in accordance with the FCMC’s requirements was 11.7% (2004: 12.5%).

As at 31 December 2005, the Group’s capital adequacy ratio based on Basle Committee guidelines was 11.7%
(2004: 12.2%), whereas the Bank’s capital adequacy ratio without taking into account the Bank’s investments in
subsidiaries was 12.2% (2004: 12.8%). The minimum capital adequacy recommended by the 1988 Basle Committee
guidelines is 8%.

Based on the guidelines set forth by the Financial and Capital Markets Commission, the capital adequacy has been
calculated as follows (comparative data for 2004 are stated at amounts before restatements (see Note 2)):

Description 31/12/2005 31/12/2004
Group Bank Group Bank
Tier 1
- paid-in share capital 65,027 65,027 65,027 65,027
- share premium 12,694 12,694 12,694 12,694
- audited retained earnings (not subject to dividend distribution) 44,786 43,772 28,334 28,334
- audited profit for the year (not subject to dividend distribution) 33,214 30,175 16,452 16,452
- minority interest 12 - 13 -
Less
- intangible assets (as defined by FCMC) (2,805) (1,223) (3,497) (3,318)
Total Tier 1 152,928 150,445 119,023 119,189
Tier 2
- fair value revaluation reserve (restricted to 55%) 1,297 1,377 2,127 2,127
Total Tier 2 1,297 1,377 2,127 2,127
Equity to be utilised in the capital adequacy ratio as per FCMC 154,225 151,822 121,150 121,316

Capital adequacy under the FCMC’s requirements
Risk
weighting
Risk weighted balance
LVL 000’s
31/12/2005
Risk weighted balance
LVL 000’s
31/12/2004
Total credit risk capital charge 8% 101,298 95,121 76,926 73,587

Foreign currency open positions subject to capital charge 2,125 1,661 1,206 1,044

Fixed income securities position risk capital charge 3,394 3,250 1,462 1,453

Equity position risk capital charge 4,087 3,882 1,447 1,438

Derivatives counterparty risk capital charges 117 117 129 129

Total capital charges 111,021 104,031 81,170 77,651

Equity to be utilised in the capital adequacy ratio 154,225 151,822 121,150 121,316

Capital Adequacy Ratio
(Equity/Total capital charges) x 8%

11.1%

11.7%

11.9%

12.5%


F-42
F-42
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



51
Based on the guidelines set forth by the Basle Committee, the capital adequacy has been calculated as follows
(comparative data for 2004 are stated at amounts before restatements (see Note 2)):

Description 31/12/2005 31/12/2004
Group Bank Group Bank
Tier 1
- paid-in share capital 65,027 65,027 65,027 65,027
- share premium 12,694 12,694 12,694 12,694
- audited retained earnings (not subject to dividend distribution) 44,786 43,772 28,334 28,334
- audited profit for the year (not subject to dividend distribution) 33,214 30,175 16,452 16,452
- minority interest 12 - 13 -
Less
- intangible assets (as defined by Basle Committee) (1,404) - (1,404) (1,404)
Total Tier 1 154,329 151,668 121,116 121,103
Tier 2
- fair value revaluation reserve (restricted to 55%) 1,297 1,377 2,127 2,127
- portfolio risk reserve (restricted to 1.25% of risk weighted assets) 6,457 6,417 5,356 5,127
Total Tier 2 7,754 7,794 7,483 7,254
Equity to be utilised in the capital adequacy ratio as per Basle
Committee
162,083 159,462 128,599 128,357

Capital adequacy under the Basle’s requirements
Risk
weighting
Risk weighted balance
LVL 000’s
31/12/2005
Risk weighted balance
LVL 000’s
31/12/2004
Total credit risk capital charge 8% 101,321 95,873 79,794 76,432

Foreign currency open positions subject to capital charge 2,125 1,661 1,206 1,044

Fixed income securities position risk capital charge 3,394 3,250 1,462 1,453

Equity position risk capital charge 4,087 3,882 1,447 1,438

Derivatives counterparty risk’s capital charges 117 117 129 129

Total capital charges 111,044 104,783 84,038 80,496

Equity to be utilised in the capital adequacy ratio 162,083 159,462 128,599 128,357

Capital Adequacy Ratio
(Equity/Total capital charges) x 8%

11.7%

12.2%

12.2%

12.8%

F-43
F-43
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



52

NOTE 34. ASSETS, LIABILITIES AND MEMORANDUM ITEMS BY MATURITY STRUCTURE

The relationship between the maturity of assets and liabilities as well as memorandum items is indicative of
liquidity risk and the extent to which it may be necessary to raise funds to meet outstanding obligations. The table
below allocates the Group’s assets, liabilities and memorandum items as at 31 December 2005 and 2004 to maturity
groupings based on the time remaining from the balance sheet date to the contractual maturity dates.


Within
1 month

1-3
months

3-6
months

6-12
months

1-5
years
Over 5
years and
undated
Total in
LVL 000’s

Assets
Cash and deposits with central banks 144,079 - - - - - 144,079
Balances due from credit institutions 267,686 18,515 13,561 587 6,443 5,791 312,583
Loans and advances to customers 79,044 32,531 22,786 68,627 309,008 367,266 879,262
Fixed income securities 944 2,220 620 2,898 214,297 211,082 432,061
Shares and other non-fixed income securities 17,034 - - - 73 13,360 30,467
Derivative financial instruments 361 131 32 5 35 - 564
Intangible assets - - - - - 2,805 2,805
Fixed assets - - - - - 23,771 23,771
Prepayments and accrued income 7,398 2,079 633 94 16 120 10,340
Other assets 2,014 223 - 241 3,871 55 6,404

Total assets 518,560 55,699 37,632 72,452 533,743 624,250 1,842,336

Liabilities
Balances due to credit institutions and central
banks 60,366 55,018 1,778 139,627 6,207 - 262,996
Deposits from customers 1,093,913 34,892 74,087 92,096 21,284 1,652 1,317,924
Issued debt securities - - - - 74,070 - 74,070
741 200 65 5 1,355 - 2,366
Accrued expense and deferred income 3,820 378 2,183 475 656 183 7,695
Current income tax liabilities 772 - - - - - 772
Deferred income tax liabilities - - - - - 608 608
Provision for liabilities and charges 109 - - - - - 109
Other liabilities 13,878 466 73 1,739 1,537 12 17,705

Total liabilities 1,173,599 90,954 78,186 233,942 105,109 2,455 1,684,245

Minority interest - - - - - 12 12

Shareholders’ equity - - - - - 158,079 158,079

Total liabilities and shareholders’ equity 1,179,529 90,954 78,186 233,942 99,179 160,546 1,842,336

Memorandum items

Contingent liabilities 19,811 387 476 134 307 - 21,115

Financial commitments 190,824 - - - - - 190,824

As at 31 December 2004
Total assets 407,045 30,966 41,081 39,591 405,929 499,869 1,424,481
Total liabilities 1,043,489 38,488 46,165 150,725 16,847 2,380 1,298,094
Total liabilities and shareholders’ equity 1,043,089 38,488 46,165 150,725 16,847 128,767 1,424,481

Currently, the Group’s and Bank’s information system does not provide an analysis of outstanding loans and
advances to customers by their remaining maturities considering the scheduled repayments during the period of
loans. Due to extensive effort required in preparation of such an analysis, presentation of such analysis in these
financial statements was not deemed practical by the Management. Accordingly, the above table has been prepared
under the assumption that all principal falls due at the final maturity date.
F-44 F-44
Derivative financial instruments
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



53

NOTE 35. REPRICING MATURITY OF ASSETS AND LIABILITIES

Interest rate risk is the sensitivity of the financial position of the Bank and its subsidiaries to the change in market
interest rates. In the normal course of business, the Bank and its subsidiaries encounter interest rate risk as a result
of differences within maturities or interest re-fixing dates of respective interest sensitive assets and liabilities. The
interest rate risk is managed through the activities of the Bank’s Treasury department. The table below allocates the
Group’s assets and liabilities as at 31 December 2005 and 2004 to maturity groupings based on the time remaining
from the balance sheet date to the closest interest re-fixing date.


Within
1 month

1-3
months

3-6
months

6-12
months

1-5
years
More
than 5
years
Non-
interest
bearing
Total
in LVL
000’s
Effective
interest
rate

Assets
Cash and deposits with central banks 107,188 - - - - - 36,891 144,079 1.6%
Balances due from credit institutions 200,851 6,081 14,816 - 8,108 - 82,727 312,583 2.6%
Loans and advances to customers 144,858 237,455 321,705 23,920 87,184 61,084 3,056 879,262 6.4%
Fixed income securities 14,653 78,797 9,352 34,085 158,979 122,191 14,004 432,061 4.6%
Shares and other non-fixed income
securities - - - - - - 30,467 30,467 -
Derivative financial instruments - - - - - - 564 564 -
Intangible assets - - - - - - 2,805 2,805 -
Fixed assets - - - - - - 23,771 23,771 -
Prepayments and accrued income - - - - - - 10,340 10,340 -
Other assets - - - - - - 6,404 6,404 -
Total assets 467,550 322,333 345,873 58,005 254,271 183,275 211,029 1,842,336

Liabilities
Balances due to credit institutions and
central banks 235,839 11,095 1,834 1,823 1,184 - 11,221 262,996 2.5%
Deposits from customers 113,919 273,756 70,220 89,259 37,082 13 733,675 1,317,924 2.1%
Issued debt securities - - - - 74,070 - - 74,070 5.1%
Derivative financial instruments - - - - - - 2,366 2,366 -
Accrued expense and deferred income - - - - - - 7,695 7,695 -
Current income tax liabilities - - - - - - 772 772 -
Deferred income tax liabilities - - - - - - 608 608 -
Provision for liabilities and charges - - - - - - 109 109 -
Other liabilities - - - - - - 17,705 17,705 -
Total liabilities 349,758 284,851 72,054 91,082 112,336 13 774,151 1,684,245

Minority interest - - - - - - 12 12 -

Shareholders’ equity - - - - - - 158,079 158,079 -

Total liabilities and shareholders’ equity 349,758 284,851 72,054 91,082 112,336 13 932,242 1,842,336

Futures - 2,887 - - - - - -
Interest rate swaps 5,930 5,9 83,238 - - - - -

As at 31 December 2004
Total assets 412,925 194,160 319,415 40,125 163,604 149,626 144,626 1,424,481
Total liabilities 400,456 38,569 54,101 70,688 21,182 1,269 711,829 1,298,094
Total liabilities and shareholders’ equity 400,456 38,569 54,101 70,688 21,182 1,269 838,216 1,424,481

Futures - 8,242 - - (1,591) (6,651) - -
Interest rate swaps (5,160) (12,190) - - 17,350 - - -

F-45
F-45
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



54

NOTE 36. CURRENCY PROFILE

The following table provides an analysis of the Group’s assets and liabilities and shareholders’ equity as well as
memorandum items outstanding as at 31 December 2005 and 2004 by currency profile:



LVL


USD


EUR


GBP


RUB


Other
Total in
LVL
000’s

Assets
Cash and deposits with central banks 114,013 7,482 10,588 1,043 352 10,601 144,079
Balances due from credit institutions 8,051 210,146 30,407 11,975 18,334 33,670 312,583
Loans and advances to customers 115,479 337,818 379,435 10 3,510 43,010 879,262
Fixed income securities 56,524 270,530 92,314 4,395 6,479 1,819 432,061
Shares and other non-fixed income securities 1,302 15,219 6,214 356 679 6,697 30,467
Derivative financial instruments 552 - - - - 12 564
Intangible assets 2,665 - - - 2 138 2,805
Fixed assets 19,980 - - - 47 3,744 23,771
Prepayments and accrued income 3,566 2,945 2,878 3 104 844 10,340
Other assets 3,343 - 322 672 1,645 422 6,404
Total assets 325,475 844,140 522,158 18,454 31,152 100,957 1,842,336

Liabilities
Balances due to credit institutions and central banks 12,420 52,106 190,961 140 - 7,369 262,996
Deposits from customers 208,685 775,190 249,532 30,985 20,757 32,775 1,317,924
Issued debt securities 5,000 - 69,070 - - - 74,070
Derivative financial instruments 2,230 - - - - 136 2,366
Accrued interest expense and deferred income 3,370 891 2,388 75 130 841 7,695
Current income tax liabilities 772 - - - - - 772
Deferred income tax liabilities 608 - - - - - 608
Provision for liabilities and charges 36 - - - - 73 109
Other liabilities 6,152 2,467 2,677 83 4,995 1,331 17,705
Total liabilities 239,273 830,654 514,628 31,283 25,882 42,525 1,684,245

Minority interest 12 - - - - - 12

Shareholders’ equity 158,079 - - - - - 158,079
Total liabilities and shareholders’ equity 397,364 830,654 514,628 31,283 25,882 42,525 1,842,336

Net long/ (short) position for balance sheet items (71,889) 13,486 7,530 (12,829) 5,270 58,432 -

Off-balance sheet claims arising from foreign
exchange
Spot exchange receivable 8,006 46,306 21,942 17,551 113 9,193 103,111
Forward foreign exchange receivable - 12,169 640 - 592 4,215 17,616
Swap exchange receivable 58,941 172,900 142,606 62,963 - 144,950 582,360
Total 66,947 231,375 165,188 80,514 705 158,358 703,087

Off-balance sheet liabilities arising from foreign
exchange
Spot exchange payable 58 53,028 22,106 16,943 - 13,091 105,227
Forward foreign exchange payable 662 5,229 7,405 - 177 4,091 17,563
Swap exchange payable 2,664 190,819 141,637 58,002 4,381 183,074 580,577
Total 3,384 249,076 171,148 74,945 4,558 200,256 703,367

Net long/ (short) positions on foreign exchange 63,563 (17,701) (5,960) 5,569 (3,853) (41,898) (280)
Net long/ (short) position as at 31 December 2005 (8,326) (4,215) 1,570 (7,260) 1,417 16,534 (280)

Net long/ (short) position as at 31 December 2004 (12,640) 2,116 (19,376) (235) 4,512 23,628 (1,995)

Exchange rates applied as at 31 December 2005
(LVL for 1 foreign currency unit) 1.00 0.593 0.702804 1.021 0.0206 - -

The short currency position in Euro is largely off-set by long positions in Lithuanian Litas and Estonian Krona.
Both of these currencies are pegged to Euro at fixed rate, therefore for the purpose of managing foreign currency
positions they are treated as positions in Euro.

F-46
F-46
AS Parex banka
Notes to the Financial Statements
for the year ended 31 December 2005



55
The Latvian banking legislation requires that open positions in each foreign currency may not exceed 10% of the
Bank’s equity (see Note 33 for the definition of equity under the FCMC’s regulations) and that the total foreign
currency open position may not exceed 20% of equity.

The Group and the Bank was in compliance with the above requirements as at 31 December 2005 and 2004.

NOTE 37. LITIGATION AND CLAIMS

In the ordinary course of business, the Bank has been involved in a number of legal proceedings to recover
collateral or outstanding credit balances, as well as related interest and expenses from defaulted credit customers
and interbank counterparties. The Group is also involved in the number of legal proceedings related to its
customers in Latvia and abroad.

The Management of the Bank believe that any legal proceedings pending as at 31 December 2005 will not result in
material losses for the Group.


NOTE 38. RELATED PARTIES

Related parties are defined as shareholders who have significant influence over the Group, members of the Council
and Board of Directors, key Management personnel, their close relatives and companies in which they have a
controlling interest as well as associated companies of the Group. The following tables present the outstanding
balances and terms of the Group’s transactions with related parties.

Amount in
LVL 000’s
31/12/2005
Average
rate in
2005
Amount in
LVL 000’s
31/12/2004
Average
rate in
2004

Credit exposure to related parties:
Loans and advances 25,186 2.4% 14,589 1.4%
Financial commitments and outstanding
guarantees 3,368 - 2,669 -
Total credit exposure to related parties 28,554 17,258


Total deposits from related parties 43,642 19.5% 28,760 20.7%


The majority of the above deposits are long-term and have been placed with the Bank at rates significantly below
the market interest rates at the time of their placement.

In the ordinary course of business, AS Parex apdrošinƗšanas kompƗnija, a related party to the Bank, undertakes
insurance of the collaterals of loans and advances granted by the Bank to customers. Subsequent to the end of the
reporting year, AS Parex apdrošinƗšanas kompƗnija has been sold to a third party.

F-47
F-47
F-48
F-49

"6%*50343&1035
S|A &SOTU:PVOH#BMUJD
Kronvalda bulvŔrls 3
Pūga, Lv-l0l0
Latvla
Phone +37l 704380l
Pax +37l 7043802

To the shareholders of a/s 1BSFYCBOLB
we have audlted the accompanylng consolldated ñnanclal statements of a/s 1BSFYCBOLB and lts subsldlarles (herelnafter - the
Group) and the accompanylng ñnanclal statements of a/s1BSFYCBOLB (herelnafter - the 8ank) for the year ended 3l December
2004, set out on pages 32 through 69, whlch comprlse the balance sheet, the statements of lncome, cash nows and changes ln
equlty and the related notes. These ñnanclal statements are the responslblllty of the 8ank's management. Our responslblllty ls
to express an oplnlon on these ñnanclal statements based on our audlt.
we conducted our audlt ln accordance wlth |nternatlonal Standards on Audltlng lssued by the |nternatlonal Pederatlon of
Accountants. Those Standards requlre that we plan and perform the audlt to obtaln reasonable assurance about whether
the ñnanclal statements are free of materlal mlsstatement. An audlt lncludes examlnlng, on a test basls, evldence supportlng
the amounts and dlsclosures ln the ñnanclal statements. An audlt also lncludes assesslng the accountlng prlnclples used and
slgnlñcant estlmates made by management, as well as evaluatlng the overall ñnanclal statement presentatlon. we belleve that
our audlt provldes a reasonable basls for our oplnlon.
|n our oplnlon, the ñnanclal statements referred to above glve a true and falr vlew of the ñnanclal posltlon of the Group and the
8ank as of 3l December 2004, and of the results of thelr operatlons and thelr cash nows for the year then ended ln accordance
wlth |nternatlonal Plnanclal Peportlng Standards lssued by the |nternatlonal Accountlng Standards 8oard.
&SOTU:PVOH#BMUJD S|A
Llcense No. l7

Per Moller DlŔna KrlsìŔne
Personal |D code: 060567-l4676 Personal |D code: 250873-l2964
Member of the 8oard Latvlan Sworn Audltor
Certlflcate No. l24
Plga, 28 Pebruary 2005
F-50
F-50
2004 32
!!k!|M|N!! 0| |NC0M| |0k !N| \|kk!
|N0|0 11 0|C|M8|k ìêê1 kN0 ìêê1
LvL 000's 2004 2003
Notes Croup ßank Group 8ank
|nterest lncome 4 58,5l8 54,096 46,370 43,6l7
|nterest expense 4 (l9,848) (l9,l53) (l8,l52) (l7,6l8)
Net lnterest lncome 38,670 34,943 28,2l8 25,999
Commlsslon and fee lncome 5 23,897 2l,6l2 22,l83 20,4l8
Commlsslon and fee expense 5 (5,074) (5,098) (4,ll4) (4,240)
Net commlsslon and fee lncome l8,823 l6,5l4 l8,069 l6,l78
Proflt on tradlng wlth flnanclal lnstruments, net 6 l3,227 l2,l90 l9,582 l7,943
Other operatlng lncome 7 l,920 l,287 l,436 807
Net operatlng lncome 72,640 64,934 67,305 60,927
Admlnlstratlve expense 8,9 (38,800) (33,933) (32,870) (28,870)
Depreclatlon and amortlsatlon expense 2l,22 (6,3l8) (5,84l) (5,782) (5,335)
Other operatlng expense (344) (340) (544) (390)
Provlslon expense for posslble credlt losses l0 (9,l09) (8,672) (l2,37l) (ll,905)
Pelease of prevlously establlshed provlslon l0 l,0l0 7l5 328 328
Proflt from lnvestments ln subsldlarles 20 (4l9) l,609 - l,22l
Proflt before corporate lncome tax and mlnorlty lnterest l8,660 l8,472 l6,066 l5,976
Corporate lncome tax ll (2,206) (2,020) (2,642) (2,553)
Proflt before mlnorlty lnterest l6,454 l6,452 l3,424 l3,423
Mlnorlty lnterest (2) - (l) -
Net profit for the year 16,452 16,452 13,423 13,423
The ñnanclal statements on pages 32 to 69 have been approved by the Management of the 8ank and slgned on thelr behalf by:
valery KAPG|N
President, Chairman of the ßoard
vlktor KPASOv|TSK¥
Chairman of the CounciI of 0irectors
Guntars GPĪN8LPGS
Chairman of the CounciI
Plga, 28 Pebruary 2005
5IFBDDPNQBOZJOHOPUFTBSFBOJOUFHSBMQBSUPGUIFTFmOBODJBMTUBUFNFOUT
F-51
F-51
"//6"-3&1035
8k|kNC| !N||!! kN0 M|M0kkN0UM |!|M! k!
k! 11 0|C|M8|k ìêê1 kN0 ìêê1
LvL 000's 3l/l2/2004 3l/l2/2003
Notes Croup ßank Group 8ank
Assets
Cash and deposlts wlth central banks l2 70,78l 63,748 64,887 59,0l7
8alances due from credlt lnstltutlons l3 3l2,870 320,259 l30,056 l44,772
Loans and advances to customers l4,l5,l6 69l,693 640,349 475,606 445,542
Plxed lncome securltles l7,l8 298,758 274,l22 347,783 325,93l
Shares and other non-flxed lncome securltles l9 ll,5l2 ll,429 9,984 9,793
|nvestments ln subsldlarles 20 - l8,369 4l9 7,84l
Derlvatlve flnanclal lnstruments 30 l,405 l,4l4 l,492 l,505
|ntanglble assets 2l 3,497 3,3l8 2,645 2,505
Plxed assets 22 23,l69 l9,452 22,928 l9,229
Prepayments and accrued lncome 23 8,334 8,006 5,772 5,6l3
Other assets 24 2,462 2,l90 3,080 l,667
7otaI assets 1,424,481 1,362,656 1,064,652 1,023,415
LiabiIities
8alances due to credlt lnstltutlons and central
banks 25 l72,250 l62,663 l06,l54 l04,l85
Deposlts from customers 26 l,l05,57l l,058,256 835,585 800,978
Derlvatlve flnanclal lnstruments 30 3,3l0 3,322 3,440 3,482
Accrued expense and deferred lncome 4,354 3,5l0 3,30l 2,859
Provlslon for llabllltles and charges 27 96l 957 787 782
Other llabllltles 28 ll,648 7,574 7,2l7 2,972
Total llabllltles l,298,094 l,236,282 956,484 9l5,258
Mlnorlty lnterest l3 - ll -
SharehoIders' equity
Pald-ln share capltal 29 65,027 65,027 63,327 63,327
Share premlum l2,694 l2,694 9,226 9,226
Palr value revaluatlon reserve 3,867 3,867 4,270 4,270
Petalned earnlngs 44,786 44,786 3l,334 3l,334
Total shareholders' equlty l26,374 l26,374 l08,l57 l08,l57
7otaI IiabiIities and sharehoIders' equity 1,424,481 1,362,656 1,064,652 1,023,415
Memorandum items
Contlngent llabllltles 30 25,900 25,888 l3,644 l2,490
Plnanclal commltments 30 l25,296 l27,825 97,333 99,8l7
Porelgn exchange contracts 30 805,00l 8l6,745 682,657 7l4,498
Other flnanclal lnstruments 30 25,592 25,592 23,549 23,549
Punds under trust management 3l l70,5l4 l3l,829 l0,l7l 2,990
The ñnanclal statements on pages 32 to 69 have been approved by the Management of the 8ank and slgned on thelr behalf by:
valery KAPG|N
1SFTJEFOU$IBJSNBOPGUIF#PBSE
vlktor KPASOv|TSK¥
$IBJSNBOPGUIF$PVODJMPG%JSFDUPST
Guntars GPĪN8LPGS
$IBJSNBOPGUIF$PVODJM
Plga, 28 Pebruary 2005
5IFBDDPNQBOZJOHOPUFTBSFBOJOUFHSBMQBSUPGUIFTFmOBODJBMTUBUFNFOUT
F-52 F-52

!!k!|M|N!! 0| CNkNû|! |N !Nkk|N0|0|k!' |0U|!\
|0k !N| \|kk! |N0|0 11 0|C|M8|k ìêê1 kN0 ìêê1
Changes ln the Group's and the 8ank's shareholders' equlty are as follows:
LvL 000's
Pald-ln
share
capltal
Share
premlum
Palr value
revaluatlon
reserve
Petalned
earnlngs
Total
share-
holders'
equlty
8alance as at l 1anuary 2003 50,000 - 3,782 l7,9ll 7l,693
|ncrease ln pald-ln share capltal l3,327 9,226 - - 22,553
Palr value revaluatlon reserve charged to
statement of lncome - - (7,5l0) - (7,5l0)
Change ln falr value of avallable for sale
securltles - - 7,998 - 7,998
Net proflt for the year - - - l3,423 l3,423
ßaIance as at 31 December 2003 63,327 9,226 4,270 31,334 108,157
|ssue of new shares l,700 3,468 - - 5,l68
Dlvldends pald - - - (3,000) (3,000)
Palr value revaluatlon reserve charged to
statement of lncome - - (5,6ll) - (5,6ll)
Changes ln falr value of avallable for sale
securltles - - 5,550 - 5,550
Deferred tax charged dlrectly to equlty - - (342) - (342)
Net proflt for the year - - - l6,452 l6,452
ßaIance as at 31 December 2004 65,027 12,694 3,867 44,786 126,374
5IFBDDPNQBOZJOHOPUFTBSFBOJOUFHSBMQBSUPGUIFTFmOBODJBMTUBUFNFOUT
F-53
F-53
"//6"-3&1035
!!k!|M|N!! 0| Ck!N ||0U! |0k !N| \|kk! |N0|0
11 0|C|M8|k ìêê1 kN0 ìêê1
LvL 000's 2004 2003
Notes Croup ßank Group 8ank
Cash infIow from operating activities
Proflt before taxatlon and mlnorlty lnterest l8,660 l8,472 l6,066 l5,976
Amortlsatlon of lntanglble assets, depreclatlon of flxed
assets 6,3l8 5,84l 5,782 5,335
Loss from sale of flxed assets - - 28 22
|ncrease ln provlslon for posslble credlt losses 8,l54 7,903 ll,886 ll,404
(Proflt) from lnvestments ln subsldlarles 4l9 (l,609) - (l,22l)
|ncrease ln provlslon for llabllltles and charges 35 35 - -
Mlnorlty lnterest - - (l0) -
Increase in cash and cash equivaIents before
changes in assets and IiabiIities 33,586 30,642 33,752 31,516
(|ncrease) ln prepayments and accrued lncome (3,069) (2,900) (6l0) (568)
Change ln derlvatlve flnanclal lnstruments (43) (69) l,298 l,493
Decrease/ (lncrease) ln other assets l,4l0 l35 l,522 276
|ncrease ln accrued expense and deferred lncome l,053 65l 638 55l
|ncrease/ (decrease) ln other llabllltles 4,690 4,904 l,090 (855)
Decrease/ (lncrease) ln tradlng lnvestments l8,305 l8,202 24,746 24,395
Decrease/ (lncrease)ln balances due from credlt
lnstltutlons (l44,08l) (l44,3l8) 66,545 66,268
(|ncrease) ln loans and advances to customers (223,647) (202,096) (l23,687) (ll7,324)
|ncrease/ (decrease) ln balances due to credlt
lnstltutlons 66,564 59,382 l3,396 9,904
|ncrease ln deposlts from customers 269,986 257,278 39,028 25,274
Increase in cash and cash equivaIents from
operating activities before corporate income tax 24,754 21,811 57,718 40,930
Corporate lncome tax (pald) (3,440) (3,l8l) (l,l40) (968)
Net cash and cash equivaIents from operating
activities 21,314 18,630 56,578 39,962
Cash (outfIow) from investing activities
(Purchase) of lntanglble and flxed assets (6,l65) (5,63l) (8,390) (7,897)
Acqulsltlons and lnvestments ln subsldlarles (6,7l0) (l0,l78) - (l,482)
Sale/ (purchase) of equlty lnvestments and other
non-tradlng lnvestments 34,568 3l,874 (3l,243) (26,632)
(Decrease) in cash and cash equivaIents from
investing activities 21,693 16,065 (39,633) (36,011)
Cash infIow from financing activities
Proceeds from lssue of new shares 5,l68 5,l68 22,553 22,553
Dlvldends (pald) (3,000) (3,000) - -
Increase in cash and cash equivaIents from
financing activities 2,168 2,168 22,553 22,553
Net cash infIow for the year 45,175 36,863 39,498 26,504
Cash and cash equivaIents at the beginning of the
year 32 107,465 98,180 67,967 71,676
Cash and cash equivaIents at the end of the year 32 152,640 135,043 107,465 98,180
|nterest recelved/ pald by the 8ank and the Group durlng the reportlng year ls not materlally dlnerent from lnterest lncome/
expense recognlsed ln the statement of lncome.
5IFBDDPNQBOZJOHOPUFTBSFBOJOUFHSBMQBSUPGUIFTFmOBODJBMTUBUFNFOUT
F-54
F-54

N0!|! !0 !N| ||NkNC|k| !!k!|M|N!!
|0k !N| \|kk |N0|0 11 0|C|M8|k ìêê1
1. |N|0kMk!|0N 0N !N| 8kNK
(Plgures ln parenthesls represent amounts as at 3l December 2003 or for the year then ended.)
A/s 1BSFYCBOLB was reglstered as a ìolnt stock company on l4 May l992. The 8ank commenced lts operatlons ln 1une l992.
The 8ank's head omce and three maln branches are located ln Plga, Latvla. As at 3l December 2004, the 8ank was operatlng a
total of 95 (l03) branches and cllent servlce centres ln Plga and throughout Latvla. The 8ank operates 6 representatlve omces:
ln Prankfurt (Germany), Stockholm (Sweden), Tokyo (1apan), Klev (Ukralne), 8aku (Azerbalìan) and Tashkent (Uzbeklstan), as well
as a subsldlary ÷ 1BSFY(SPVQ3FQSFTFOUBUJPO-JNJUFE ln London (Unlted Klngdom) actlng as the 8ank's representatlve omce.
The 8ank owns also l6 other subsldlarles whlch operate ln varlous ñnanclal markets sectors as descrlbed ln Note 20.
The 8ank's maln areas of operatlon lnclude: acceptlng deposlts from customers, grantlng short-term and long-term loans to the
State Treasury, local munlclpalltles, corporate customers, prlvate lndlvlduals and other credlt lnstltutlons, lssulng and servlclng
payment cards, deallng wlth ñnance lease and forelgn exchange transactlons. The 8ank oners lts cllents also trust management
and lnvestment banklng servlces, performs local and lnternatlonal payments, as well as provldes a wlde range of other ñnanclal
servlces.
As at 3l December 2004, the 8ank had l,970 (l,8l0) employees, 20,630 (20,500) loan and ñnance lease customers, l04,524
(85,208) settlement card holders and l67,450 (l36,l00) deposlt customers. The maln shareholders of the 8ank are Latvlan
cltlzens Mr. valery Kargln and Mr. vlktor Krasovltsky (see Note 29).
ì. !UMMkk\ 0| !|ûN|||CkN! kCC0UN!|Nû |0||C||!
The 8ank malntalns lts books of account and prepares ñnanclal statements for regulatory purposes ln Lats, ln accordance
wlth accountlng prlnclples and practlces employed by domestlc banks as requlred by stlpulatlons of the Plnanclal and Capltal
Market Commlsslon (PCMC) and other Latvlan accountlng regulatlons appllcable for credlt lnstltutlons, whlch are ln all materlal
respects conslstent wlth |nternatlonal Plnanclal Peportlng Standards (|PPS). The subsldlarles of the 8ank malntaln thelr books
of account and prepare ñnanclal statements for statutory purposes ln thelr local currency ln accordance wlth accountlng
prlnclples and practlces of the respectlve countrles. These accountlng prlnclples and practlces ln all materlal respects are
conslstent wlth |PPS. Certaln dlsclosures are prepared ln the format requlred by the PCMC and employed by domestlc banks.
A summary of the Group's prlnclpal accountlng pollcles, all of whlch have been applled conslstently (unless otherwlse stated)
throughout the years ended 3l December 2004 and 2003, ls set out below.
B 3FQPSUJOH$VSSFODZ
The accompanylng ñnanclal statements are reported ln thousands of Lats (LvL 000's).
C #BTJTPG1SFQBSBUJPO
These ñnanclal statements are prepared based on the accountlng records, whlch are malntalned under the hlstorlcal cost
conventlon, modlñed for revaluatlons to falr value as dlsclosed below.
D #BTJTPG$POTPMJEBUJPO
As at 3l December 2004 and 2003, the 8ank had a number of lnvestments ln subsldlarles, ln whlch the 8ank held dlrectly and
lndlrectly more than 50% of the shares and votlng rlghts, and accordlngly, had the ablllty to exerclse control. More detalled
lnformatlon on the 8ank's subsldlarles has been presented ln Note 20.
The 8ank's subsldlarles are accounted ln the 8ank's ñnanclal statements under the equlty method. The ñnanclal statements
of a/s 1BSFY CBOLB and lts subsldlarles are consolldated ln the Group's ñnanclal statements on a llne by llne basls by addlng
together llke ltems of assets and llabllltles as well as lncome and expenses. Por the purposes of consolldatlon, lntra-group
balances and lntra-group transactlons, lncludlng lnterest lncome and expense as well as unreallsed proñts and loss resultlng
from lntra-group transactlons, are ellmlnated ln the Group's ñnanclal statements.
F-55
F-55
E *ODPNFBOE&YQFOTF3FDPHOJUJPO
|nterest lncome and expense ltems are recognlsed on an accrual basls uslng the enectlve lnterest rate. No lnterest lncome ls
recognlsed on non-performlng loans and advances (see paragraph J) on whlch lnterest ls unllkely to be collected.
Commlsslons ln respect of ñnanclal assets or ñnanclal llabllltles are deferred and recognlsed as an adìustment to the enectlve
yleld on the respectlve asset or llablllty. Other commlsslons and fees are credlted and/ or charged to the statement of lncome
as earned/ lncurred.
F 'PSFJHO$VSSFODZ5SBOTMBUJPO
Transactlons denomlnated ln forelgn currencles are recorded ln Lats at actual rates of exchange enectlve at the date of the
transactlon. Monetary assets and llabllltles denomlnated ln forelgn currencles are translated lnto Lats at the omclal rate of
exchange prevalllng at the end of the year. Any galn or loss resultlng from a change ln rates of exchange subsequent to the date
of the transactlon ls lncluded ln the statement of lncome as a proñt or loss from revaluatlon of forelgn currency posltlons.
G 5BYBUJPO
Por the year ended 3l December 2004 corporate lncome tax ls applled at the rate of l5% (l9%) on taxable lncome generated
by the 8ank for the taxatlon perlod.
Deferred corporate lncome tax arlslng from temporary dlnerences ln the tlmlng of the recognltlon of ltems ln the tax returns
and these ñnanclal statements ls assessed uslng the llablllty method. The deferred corporate lncome tax ls determlned based
on the tax rates that are expected to apply when the tlmlng dlnerences reverse. The prlnclpal temporary tlmlng dlnerences
arlse from dlnerlng rates of accountlng and tax depreclatlon on the 8ank's ñxed assets, revaluatlon of securltles, as well as the
treatment of general provlslon and provlslon for vacatlon pay reserve.
The carrylng amount of deferred corporate lncome tax asset, lf any, ls revlewed at each balance sheet date and reduced to the
extent that lt ls no longer probable that sumclent taxable proñt wlll be avallable to allow all or part of the deferred lncome tax
asset to be utlllsed.
H -PBOTBOE"EWBODFTUP$VTUPNFST
Loans and advances to customers are stated at amortlsed cost, less lmpalrment provlslon for posslble credlt losses.
I -FBTFT
Plnance leases, whlch confer rlghts and obllgatlons slmllar to those attached to owned assets, are recognlsed as assets and
llabllltles at amounts equal at the lnceptlon of the lease to the falr value of the leased property or, lf lower, at the present
value of the mlnlmum lease payments. The ñnance lncome ls allocated to perlods durlng the lease term to produce a constant
perlodlc return on the net lnvestments outstandlng ln respect of the ñnance leases.
Por the purposes of these ñnanclal statements, ñnance lease recelvables are lncluded ln loans and advances to customers.
Pentals under operatlng leases are charged to the statement of lncome on a stralght-llne basls over the lease term.
J 1SPWJTJPOGPS1PTTJCMF$SFEJU-PTTFT
Non-performlng loans and advances to customers, lncludlng banklng lnstltutlons, are deñned as loans and other credlt balances
ln whlch contractually due prlnclpal ls l4 days or more overdue: contractually due lnterest ls 90 days or more overdue: or the
Management otherwlse belleves that the contractual lnterest or prlnclpal due wlll not be collected.
The Group has granted commerclal and consumer loans to customers throughout lts market area. The economlc condltlon
of the market area may have an lmpact on the borrowers' ablllty to repay thelr debts. The Management of the Group have
consldered both speclñc and general rlsks ln determlnlng the balance of provlslon for posslble credlt losses. Provlslon for
posslble credlt losses ls establlshed to represent the estlmated amounts of probable losses that have been lncurred at the
balance sheet date. The speclñc element of the provlslon relates to credlts that have obìectlve evldence of lmpalrment. The
speclñc provlslon ls determlned after lndlvldual revlew of all credlts wlth obìectlve lndlcatlons of potentlal lmpalrment. The
general (portfollo) element of the provlslon relates to the potentlal losses, whlch experlence lndlcates are present ln the
Group's portfollo of loans and advances to customers, but have not yet been speclñcally ldentlñed through lndlvldual obìectlve
evldence.
F-56

The speclñc provlslon for posslble credlt losses ls assessed as a dlnerence between the present value of expected future cash
nows dlscounted at the loans' orlglnal enectlve lnterest rate and the loan's outstandlng balance. The value of collateral held
ln connectlon wlth loans ls based on the estlmated reallsable value of the asset and ls taken lnto account when estlmatlng
present values of expected future cash nows.
The general (portfollo) provlslon for estlmatlng posslble credlt losses ls based upon a hlstorlcal pattern of losses ln the loan
portfollo, as well as taklng lnto account credlt concentratlon rlsk, changes ln collateral values, current economlc condltlons and
general market or operatlng events that have occurred prlor to the balance sheet date, for whlch a speclñc credlt rlsk provlslon
ls not yet quantlñable.
when loans and advances cannot be recovered, they are wrltten-on and charged agalnst provlslon for posslble credlt losses.
They are not wrltten-on untll all the necessary legal procedures have been completed and the amount of the loss ls ñnally
determlned.
K 'JYFE*ODPNF4FDVSJUJFT
The Group classlñes lts lnvestments ln ñxed lncome securltles lnto three categorles: held for tradlng, held to maturlty and
avallable for sale. The classlñcatlon of lnvestments between the categorles ls determlned at acqulsltlon based on the guldellnes
establlshed by the Management.
)FMEGPSUSBEJOH
Plxed lncome securltles are classlñed as held for tradlng lf they are elther acqulred for generatlng a proñt from short-term
nuctuatlons ln prlce or dealer's margln, or are lncluded ln a portfollo ln whlch a pattern of short-term proñt taklng exlsts. Held
for tradlng securltles are lnltlally recognlsed at cost and subsequently re-measured at falr value based on avallable market
prlces. The result of re-measurlng tradlng securltles at falr value ls lncluded ln the statement of lncome as proñt/(loss) from
tradlng and revaluatlon of securltles held for tradlng purposes.
)FMEUPNBUVSJUZ
Plxed lncome securltles are classlñed as held to maturlty lf the Group has both the posltlve lntent and ablllty to hold these
lnvestments to maturlty. Held to maturlty lnvestments are carrled at amortlsed cost uslng the enectlve lnterest rate method,
less any provlslon for lmpalrment.
A ñnanclal asset ls lmpalred lf lts carrylng amount ls greater than lts estlmated recoverable amount. The amount of the
lmpalrment loss for assets carrled at amortlsed cost ls calculated as the dlnerence between the asset's carrylng amount and the
present value of expected future cash nows dlscounted at the ñnanclal lnstrument's orlglnal enectlve lnterest rate.
|n rare clrcumstances due to the change of lntent and ablllty to hold ñxed lncome securltles tlll thelr maturlty, certaln securltles
lnltlally classlñed as avallable for sale lnvestments are transferred lnto the held to maturlty category. Por such securltles, the falr
value of transferred securltles as at the date of transfer becomes lts new amortlsed cost. The respectlve falr value revaluatlon
reserve recognlsed under equlty ls amortlsed to lnterest lncome over the remalnlng perlod untll maturlty.
"WBJMBCMFGPSTBMF
|nvestments ln ñxed lncome securltles lntended to be held for an undeñned perlod of tlme, whlch may be sold ln response to
needs for llquldlty or changes ln lnterest rates, exchange rates or equlty prlces are classlñed as avallable for sale.
Avallable for sale ñnanclal assets are lnltlally stated at cost and subsequently re-measured at falr value based on avallable
market prlces or quotes of brokers. The result of falr value revaluatlon of avallable for sale securltles ls recognlsed ln equlty
as a falr value revaluatlon reserve. The dlnerence between the cost and amortlsed cost determlned by the enectlve lnterest
rate method ls treated as lnterest lncome or expense. when the securltles are dlsposed of, the related accumulated falr value
revaluatlon ls lncluded ln the statement of lncome as proñt/(loss) from tradlng wlth securltles avallable for sale. |f there ls
obìectlve evldence that the value of an lnvestment has been lmpalred, the cumulatlve net loss that has been recognlsed
dlrectly ln equlty ls charged to the statement of lncome and the asset ls stated ln the balance sheet at the recoverable amount
calculated as dlscounted future cash nows uslng current market lnterest rate for slmllar ñnanclal assets.
where there ls evldence of a recent actual pattern of short-term proñt taklng wlth avallable for sale ñnanclal assets, such assets
are reclasslñed lnto the tradlng category. Any prevlous galns or losses on such assets that have been recognlsed dlrectly ln
equlty as a falr value revaluatlon reserve wlll remaln ln equlty untll the respectlve ñnanclal asset has been sold or otherwlse
dlsposed of, at whlch tlme the correspondlng galn or loss wlll be recognlsed ln the statement of lncome.
F-57
F-57
"//6"-3&1035
L 4IBSFTBOE0UIFS/POmYFE*ODPNF4FDVSJUJFT
|nvestments ln shares and other non-ñxed lncome securltles are classlñed elther as held for tradlng or avallable for sale based
on the Group's lntentlon to generate proñt on short-term prlce nuctuatlons or to hold the lnvestment for an lndeñnlte perlod
respectlvely.
Unreallsed galns or losses arlslng as a result of statlng lnvestments ln shares held for tradlng purposes at market value are
respectlvely credlted or charged to the statement of lncome as proñt/(loss) from tradlng and revaluatlon of securltles held for
tradlng purposes.
|nvestments ln shares avallable for sale are lnltlally stated at cost and subsequently re-measured at thelr falr value based on
avallable market prlces and quotes of brokers. where the falr value ls not avallable, the lnvestment ln shares ls stated ln the
balance sheet at cost less any provlslon for lmpalrment determlned on an lndlvldual lnvestment basls. The result of falr value
revaluatlon of shares avallable for sale ls recognlsed ln equlty as a falr value revaluatlon reserve.
M *OWFTUNFOUTJO"öMJBUFE&OUJUJFT
|nvestments ln amllated entltles, ln whlch the 8ank and lts subsldlarles own dlrectly and lndlrectly more than 20% but less than
50% of the votlng rlghts, are accounted for ln the 8ank's and the Group's ñnanclal statements under the equlty method. Thls
method ls approprlate as the 8ank's and lts subsldlarles' lnvestment lnterests enable the 8ank and lts subsldlarles to lnnuence,
but not ultlmately control, the operatlng or ñnanclal declslons of these entltles. Under thls method, the 8ank and the Group
lnclude lnvestments ln amllated entltles as long-term assets valued at the orlglnal cost of the lnvestment adìusted for the 8ank's
and lts subsldlarles' share of the post acqulsltlon earnlngs or losses of the lnvestment, adìusted for dlvldend lncome recelved.
The adìustment ls recorded on a regular basls to the statement of lncome ln respect of the changes occurrlng durlng the year.
N*OUBOHJCMF"TTFUT
|ntanglble assets comprlse goodwlll from the acqulsltlon of subsldlarles, as well as software, capltallsed costs relatlng to
leasehold rlghts and other lntanglble assets.
Goodwlll arlslng from the acqulsltlon of subsldlarles prlor to 3l March 2004 ls amortlsed over the perlod of 5 years on a
stralght-llne basls. Amortlsatlon on the aforementloned goodwlll wlll be applled untll 3l December 2004. As at l 1anuary 2005,
accumulated amortlsatlon of goodwlll wlll be ellmlnated agalnst the lnltlally recognlsed amount of goodwlll, and the carrylng
amount wlll be recorded ln accordance wlth the prlnclples appllcable to goodwlll arlslng from acqulsltlons subsequent to
3l March 2004.
Goodwlll arlslng from the acqulsltlon of subsldlarles subsequent to 3l March 2004 ls recorded at cost less any accumulated
lmpalrment losses. Goodwlll ls tested for lmpalrment at each reportlng date, or more frequently lf events or changes ln
clrcumstances lndlcate that the goodwlll mlght be lmpalred.
Leasehold rlghts are amortlsed over the remalnlng lease contract on a stralght-llne basls. Annual amortlsatlon rates applled on
a stralght-llne basls to software and other lntanglble assets range from 20% to 50%.
O 'JYFE"TTFUT
Plxed assets are recorded at hlstorlcal cost less accumulated depreclatlon. Plxed assets are perlodlcally revlewed for lmpalrment.
|f the recoverable value of a ñxed asset ls lower than lts carrylng amount, the respectlve asset ls wrltten down to lts recoverable
value.
Depreclatlon ls calculated uslng the stralght-llne method based on the estlmated useful llfe of the asset. The followlng
depreclatlon rates have been applled:
Category Annual depreclatlon rate
8ulldlngs 2%
Transport vehlcles 20%
Other flxed assets 20% - 33%
Leasehold lmprovements are capltallsed and depreclated over the remalnlng lease contract perlod on a stralght-llne basls.
Assets under constructlon are not depreclated.
F-58
F-58

Certaln reconstructlon and renovatlon costs of bulldlngs, whlch lmprove thelr quallty and performance, are capltallsed and
amortlsed over a ñve year perlod on a stralght-llne basls.
Malntenance and repalr costs are charged to the statement of lncome as lncurred.
P 4BMFBOE3FQVSDIBTF"HSFFNFOUT
These agreements are consldered ñnanclng transactlons. Under sale and repurchase agreements, where the Group ls the
transferor, assets transferred remaln on the Group's balance sheet and are subìect to the Group's usual accountlng pollcles. The
purchase prlce recelved ls consldered a llablllty owed to the transferee.
where the Group ls the transferee, the assets are not lncluded ln the Group's balance sheet, but the purchase prlce pald by lt to
the transferor ls lncluded as an asset. |nterest lncome or expense arlslng from outstandlng sale and repurchase agreements ls
recognlsed ln the statement of lncome over the term of the agreement.
Q %FSJWBUJWF'JOBODJBM*OTUSVNFOUT
|n the ordlnary course of buslness, the Group engages, collectlvely, to contracts for forward forelgn exchange rate and currency
swap lnstruments, as well as optlons and other ñnanclal lnstruments. Por the accountlng purposes, all derlvatlves are classlñed
as held for tradlng purposes and accounted for as follows.
Subsequent to lnltlal recognltlon and measurement, outstandlng forward forelgn exchange rate contracts, currency swaps and
other ñnanclal lnstruments are carrled ln the balance sheet at thelr falr value. The falr value of these lnstruments ls recognlsed
on the balance sheet under deslgnated assets and llabllltles captlon %FSJWBUJWFmOBODJBMJOTUSVNFOUT. The notlonal amounts of
these ñnanclal lnstruments are reported ln on-balance sheet accounts.
Optlons are carrled at the falr value based on avallable market prlces and quotes of lnternatlonal brokerage ñrms. The falr
value of the optlons ls recognlsed on the balance sheet as %FSJWBUJWFmOBODJBMJOTUSVNFOUT. The notlonal amounts of optlons are
reported ln on-balance sheet accounts.
Galns or losses from changes ln the falr value of outstandlng forward forelgn exchange rate contracts, currency swaps, optlons
and other ñnanclal lnstruments are recognlsed ln the statement of lncome as they arlse.
R 0õCBMBODF4IFFU'JOBODJBM$PNNJUNFOUTBOE$POUJOHFOU-JBCJMJUJFT
|n the ordlnary course of buslness, the Group ls lnvolved wlth on-balance sheet ñnanclal commltments and contlngent
llabllltles comprlsed of commltments to extend loans and advances, commltments for unutlllsed credlt llnes or credlt card
llmlts, ñnanclal guarantees and commerclal letters of credlt. Such commltments and contlngent llabllltles are recorded ln the
ñnanclal statements when the commltment ls establlshed.
Commltments to extend loans and advances and commltments for unutlllsed credlt llnes or credlt card llmlts represent
contractual commltments to make loans and revolvlng credlts. Commltments generally have ñxed explratlon dates, or other
termlnatlon clauses. Slnce commltments may explre wlthout belng drawn upon, the total contract amounts do not necessarlly
represent future cash requlrements.
Plnanclal guarantees and letters of credlt commlt the Group to make payments on behalf of customers contlngent upon the
fallure of a customer to perform under the terms of the contract. Accordlngly, they do not present a commltment or result ln an
outnow of funds untll the customer defaults.
The methodology for provlslonlng agalnst posslble losses arlslng from on-balance sheet ñnanclal commltments and contlngent
llabllltles ls conslstent wlth that adopted for loans and advances to customers as descrlbed ln paragraph J) above.
S 1SPWJTJPOT
Provlslons are recognlsed when the Group has a present legal or constructlve obllgatlon as a result of past events, lt ls probable
that an outnow of resources embodylng economlc beneñts wlll be requlred to settle the obllgatlon, and a rellable estlmate of
the amount of the obllgatlon can be made.
Lmployee entltlements to regular vacatlons are recognlsed when they accrue to employees. A provlslon ls made for the
estlmated llablllty of employee vacatlon pay based on unused vacatlons by employees up to the balance sheet date.
F-59
F-59
"//6"-3&1035
T 5SVTU"DUJWJUJFT
Punds managed by the Group on behalf of lndlvlduals, corporate customers, trusts and other lnstltutlons are not regarded
as assets of the Group and, therefore, are not separately lncluded ln the balance sheet. Punds under trust management are
presented ln these ñnanclal statements only for dlsclosure purposes.
U 'BJS7BMVFTPG'JOBODJBM"TTFUTBOE-JBCJMJUJFT
Palr value represents the amount at whlch an asset could be exchanged or a llablllty settled on an arm's length basls. where, ln
the oplnlon of the Management, the falr values of ñnanclal assets and llabllltles dlner materlally from thelr book values, such
falr values are separately dlsclosed ln the notes to the ñnanclal statements. The Management also belleves that conslderlng the
present market condltlons there are no adequate valuatlon models whlch would allow Management to assess the falr value of
outstandlng loans.
V $BTIBOE$BTI&RVJWBMFOUT
Por the purpose of presentatlon ln the statement of cash nows, cash and cash equlvalents are deñned as the total amounts
of cash as well as demand deposlts wlth central banks and other credlt lnstltutlons less demand deposlts due to other credlt
lnstltutlons.
46.."3:0''*/"/$*"-3*4,."/"(&.&/510-*$*&4
|n the ordlnary course of buslness, the Group ls exposed to varlous ñnanclal rlsks. Those ñnanclal rlsks lnclude: malnly credlt
rlsk, market rlsk and llquldlty rlsk. |n order to manage the above rlsks, the Management of the Group have approved the rlsk
management pollcles whlch are brleny summarlsed below.
B $SFEJUSJTL
Credlt rlsk relates to uncertalnty ln a counterparty's ablllty or wllllngness to meet lts contractual obllgatlons, thus causlng
ñnanclal loss for the entltles wlthln the Group. The Group manages the level of credlt rlsk lt undertakes by establlshlng llmlts
per lndlvldual counterparty, or groups of counterpartles wlth slmllar characterlstlcs, as well as for geographlcal segments,
taklng lnto conslderatlon the tlme duratlon of such llmlts. The adequacy of llmlts ls monltored by the 8ank's Plsk Management
Commlttee on a regular basls. Dally monltorlng of compllance wlth establlshed llmlts ls carrled out by the 8ank's 8ack Omce
Department. The Group's exposure to credlt rlsk ls further reduced by obtalnlng adequate collaterals and guarantees, as
well as by exerclslng rlgorous monltorlng procedures of the ñnanclal vlablllty of counterpartles throughout the contractual
relatlonshlp.
The Group's maxlmum exposure to credlt rlsk ls represented by the carrylng amount of each ñnanclal asset, lncludlng derlvatlve
ñnanclal lnstruments, ln the balance sheet. Analysls of the Group's credlt exposures ls presented ln Notes l3, l4, l7, 30 and 33.
C .BSLFUSJTL
Market rlsk ls the ñnanclal rlsk of uncertalnty ln the future market value of a portfollo of assets and/or llabllltles due to changes
ln lnterest rates, forelgn exchange rates and prlce of commodltles or equlty lnstruments. The Group ls malnly exposed to
changes ln lnterest rates and forelgn exchange rates.
The Group's exposure to lnterest rate rlsk ls managed on a dally basls by the 8ank's Treasury Department and ls monltored on a
regular basls by the Assets and Llabllltles Management Commlttee. Tools used by the Treasury Department and the Commlttee
lnclude: gap analysls, duratlon analysls and sensltlvlty analysls. 8ased on such analyses, the Group's cost of funds and market
sltuatlon, the Commlttee sets benchmark rates for lendlng to customers and acceptlng of deposlts from customers, as well as
provldes guldellnes for the management of the 8ank's lnvestment portfollo and use of derlvatlve ñnanclal lnstruments. The
lnterest rate reprlclng analysls of the Group's assets and llabllltles ls presented ln Note 35.
The Group's exposure to forelgn exchange rate nuctuatlons ls also managed by the Treasury Department and the Assets and
Llabllltles Management Commlttee. The Commlttee determlnes llmlts for open posltlons ln lndlvldual currencles as well as for
total open posltlons. The Group's exposure to forelgn currency rlsk ls presented ln Note 36.
As deemed necessary, the Group's exposure to market rlsks ls further reduced by utlllslng derlvatlve ñnanclal lnstruments.
F-60
F-60

c) Liquidity risk
Llquldlty rlsk relates to the ablllty of the Group to meet lts ñnanclal obllgatlons when they fall due wlthout lncurrlng substantlal
losses. The llquldlty rlsk ls managed by strlngent monltorlng and plannlng of the movements malntalnlng the balance of
demand deposlts wlth banks and cash on hand, and allocatlng a predetermlned proportlon of the Group's assets to hlghly
llquld ñnanclal lnstruments and short-term deposlts. The determlnatlon of such a proportlon ls based on the analysls of the
maturltles of the 8ank's contractual obllgatlons, lncludlng outstandlng llabllltles and commltments as well as based on the
potentlal calls for wlthdrawal of funds from current accounts, overnlght deposlts, loans and credlt llnes granted as well as
under guarantees lssued by the Group. The Group's assets and llabllltles as well as memorandum ltems by thelr remalnlng
contractual maturltles are presented ln Note 34.
1. |N!|k|!! |NC0M| kN0 |/||N!|
LvL 000's 2004 2003
Croup ßank Group 8ank
Interest income:
- lnterest on balances due from credlt lnstltutlons and
central banks 3,555 4,l59 l,8l4 2,287
- lnterest on loans and advances to customers 37,255 33,253 26,7l8 24,323
- lnterest on flxed lncome securltles l7,708 l6,684 l7,838 l7,007
7otaI interest income 58,518 54,096 46,370 43,617
Interest expense:
- lnterest on balances due to credlt lnstltutlons and
central banks (2,784) (2,6l0) (2,330) (2,368)
- lnterest on deposlts from customers (l7,064) (l6,543) (l5,822) (l5,250)
7otaI interest expense (19,848) (19,153) (18,152) (17,618)
Net interest income 38,670 34,943 28,218 25,999
î. C0MM|!!|0N kN0 ||| |NC0M| kN0 |/||N!|
LvL 000 2004 2003
Croup ßank Group 8ank
Commission and fee income:
- transactlons wlth settlement cards 8,9l5 8,643 7,795 7,5l8
- payment transfer fee 8,227 7,489 8,496 8,057
- revlew of loan appllcatlons and collateral evaluatlon 2,047 l,99l 2,l62 2,092
- securltles l,628 l,020 903 665
- cash dlsbursement/ transactlon commlsslon l,084 924 994 878
- servlce fee for account malntenance 8l4 790 577 549
- letters of credlt and guarantees 447 447 4l4 4l4
- cash collectlon 309 308 258 245
- customs brokerage 426 - 584 -
7otaI commission and fee income 23,897 21,612 22,183 20,418
Commission and fee expense:
- fees related to settlement card operatlons (2,548) (2,36l) (2,235) (2,044)
- fees related to correspondent accounts (l,956) (l,8l5) (l,584) (l,584)
- brokerage and custodlan fees (570) (922) (295) (6l2)
7otaI commission and fee expense (5,074) (5,098) (4,114) (4,240)
Net commission and fee income 18,823 16,514 18,069 16,178
F-61
F-61
"//6"-3&1035
ã. |k0||! 0N !kk0|Nû U|!N ||NkNC|k| |N!!kUM|N!!, N|!
LvL 000's 2004 2003
Croup ßank Group 8ank
Proflt from tradlng and revaluatlon of securltles held for
tradlng purposes l,48l l,403 7,034 6,986
Proflt from dlsposal of avallable for sale securltles 5,6ll 5,l70 7,5l0 6,963
Proflt from forelgn exchange tradlng and revaluatlon of
open posltlons 6,5l6 5,998 5,694 4,650
(Loss) from tradlng and revaluatlon of other flnanclal
lnstruments (38l) (38l) (656) (656)
Profit on trading with financiaI instruments, net 13,227 12,190 19,582 17,943
I. 0!N|k 0||kk!|Nû |NC0M|
LvL 000's 2004 2003
Croup ßank Group 8ank
Penaltles recelved l,33l 872 456 432
Dlvldends recelved l36 l36 43 6l
Safety boxes rental lncome 46 40 50 44
Other lncome 407 239 887 270
7otaI other operating income 1,920 1,287 1,436 807
ë. k0M|N|!!kk!|\| |/||N!|
LvL 000's 2004 2003
Croup ßank Group 8ank
Personnel expense 20,660 l7,803 l7,l88 l4,84l
Advertlslng, marketlng and sponsorshlp 3,2l3 3,040 3,058 2,853
Travel and representatlon 3,04l 2,98l 2,773 2,738
Pepalrs and malntenance 2,588 2,455 2,ll5 l,988
Communlcatlons (telephone, telex, mall) l,762 l,568 l,804 l,62l
Consultlng and professlonal fees l,285 l,034 l,7l6 l,470
LDP malntenance l,l96 973 835 654
Pent for premlses l,000 853 86l 720
Offlce expense 586 530 537 5l2
Pepresentatlve offlce expense 408 408 384 384
Securlty 365 334 356 306
Peal estate and other taxes 276 l88 382 l62
|nsurance 63 59 ll2 60
Non-refundable value added tax l,2l4 l,026 - -
Other admlnlstratlve expense l,l43 68l 749 56l
7otaI administrative expense 38,800 33,933 32,870 28,870
Up untll l May 2004, ln accordance wlth the Latvlan tax leglslatlon, the 8ank was unable to recover any vAT charged to the
8ank by lts suppllers. vAT on servlces recelved or assets acqulred was charged to the statement of lncome or capltallsed ln the
balance sheet together wlth the respectlve expense ltem or asset acqulred, respectlvely. As from l May 2004, due to change ln
tax laws followlng Latvla's accesslon to the Luropean Unlon, vAT ls recorded separately and only non-refundable part of vAT ls
charged to the statement of lncome.
F-62
F-62

º. ||k!0NN|| |/||N!|
Personnel expense lncludes: remuneratlon for work to the personnel and related soclal securlty contrlbutlons and other
beneñts costs.
LvL 000's 2004 2003
Croup ßank Group 8ank
Pemuneratlon for work l7,029 l4,76l l4,ll5 l2,276
Soclal securlty contrlbutlons 3,63l 3,042 3,073 2,565
7otaI personneI expense 20,660 17,803 17,188 14,841
The Chalrman of the 8oard of Dlrectors and the Chalrman of the Councll of Dlrectors of the 8ank have not recelved any
remuneratlon ln respect of thelr servlces to the 8ank. The total remuneratlon pald by the 8ank to the members of the Councll
and the 8oard of Dlrectors amounted to LvL 408 (l42) thousand.
Personnel expense has been presented ln these ñnanclal statements wlthln admlnlstratlve expense.
Durlng the year ended 3l December 2004, the average number of personnel employed by the Group and the 8ank was 2,2l6
(2,0ll) and l,9l4 (l,699), respectlvely.
1ê. |k0\|!|0N |/||N!| |0k |0!!|8|| Ck|0|! |0!!|! kN0 k|||k!|
0| |k|\|0U!|\ |!!k8||!N|0 |k0\|!|0N
An analysls of the change ln provlslon for posslble credlt losses ls presented as follows:
LvL 000's 2004 2003
Croup ßank Group 8ank
7otaI provision at the beginning of the year 25,865 25,091 19,251 18,128
Provlslon expense for posslble credlt losses 9,l09 8,672 l2,37l ll,905
Pelease of prevlously establlshed provlslon (l,0l0) (7l5) (328) (328)
Provision charged to the statement of income, net 8,099 7,957 12,043 11,577
Change of provlslon due to wrlte-offs, net 52 (65) (5,272) (4,44l)
|ncrease/ (decrease) ln provlslon due to currency
fluctuatlons 38 46 (l57) (l73)
7otaI provision for possibIe credit Iosses at the end of
the year 34,054 33,029 25,865 25,091
The followlng table provldes a speclñcatlon of the provlslon for posslble credlt losses:
LvL 000's 31/12/2004 3l/l2/2003
Croup ßank Group 8ank
8alances due from credlt lnstltutlons 2,222 2,20l 2,l42 2,l42
Loans and advances to customers 22,894 2l,9l7 l5,334 l4,628
Plxed lncome securltles 7,094 7,094 7,045 7,045
Accrued lnterest lncome l,657 l,657 l,l50 l,l50
Other assets l3l l04 l73 l05
Memorandum ltems 56 56 2l 2l
7otaI 34,054 33,029 25,865 25,091
F-63
F-63
"//6"-3&1035
5"9"5*0/
Corporate lncome tax expense comprlses the followlng ltems:
LvL 000's 2004 2003
Croup ßank Group 8ank
Current corporate lncome tax 2,207 2,020 2,6ll 2,52l
Deferred corporate lncome tax (203) (202) 3l 32
Tax wlthheld abroad 2l0 2l0 - -
Prlor year adìustments (8) (8) - -
7otaI corporate income tax expense 2,206 2,020 2,642 2,553
The reconclllatlon of the 8ank's and the Group's pre-tax proñt for the year to the corporate lncome tax expense for the year may
be speclñed as follows:
LvL 000's 2004 2003
Croup ßank Group 8ank
Proflt before corporate lncome tax l8,660 l8,472 l6,066 l5,976
(Proflt)/ loss from lnvestments ln subsldlarles 4l9 (l,609) - (l,22l)
Adjusted profit before corporate income tax 19,079 16,863 16,066 14,755
Corporate income tax (at standard rate) ª 2,862 2,529 3,053 2,803
Non-temporary dlfferences, net (49) 98 l94 34l
Prlor year adìustments (8) (8) - -
Tax reductlons (donatlons and other deductlons) (599) (599) (605) (59l)
7otaI corporate income tax expense 2,206 2,020 2,642 2,553
` Standard rate for the year ended 3l December 2004 was l5% (2003: l9%).
The movements ln deferred corporate lncome tax llablllty can be speclñed as follows:
LvL 000's 2004 2003
Croup ßank Group 8ank
As at l 1anuary 766 76l 8l7 729
Charge to statement of lncome (203) (202) 3l 32
Charge to equlty 342 342 - -
Lxcluslon of non-consolldated subsldlarles - - (82) -
7otaI deferred corporate income tax IiabiIity at the
end of the year 905 901 766 761
Deferred corporate lncome tax assets and llabllltles can be speclñed as follows:
LvL 000's 2004 2003
Croup ßank Group 8ank
Deferred tax llabllltles:
Accumulated excess of tax depreclatlon over accountlng
depreclatlon l,287 l,283 l,494 l,489
Pevaluatlon of securltles 50l 50l - -
Deferred tax assets:
General provlslon for posslble credlt losses (769) (769) (620) (620)
Lmployee vacatlon pay accrual (ll4) (ll4) (l08) (l08)
7otaI deferred corporate income tax IiabiIity 905 901 766 761
F-64
F-64

The movements ln tax accounts of the 8ank durlng 2004 can be speclñed as follows:
LvL 000's
8alance
as at
3l/l2/2003
Calculated
ln 2004
Pald
ln 2004
8alance
as at
3l/l2/2004
Corporate lncome tax (294) (2,020) 2,97l 657
Corporate lncome tax wlthheld abroad - (2l0) 2l0 -
Soclal securlty contrlbutlons - (4,080) 4,080 -
Personal lncome tax - (3,0l4) 3,0l4 -
vAT (l0) l7 203 2l0
Peal estate tax (6) (l58) l64 -
7otaI tax receivabIe/ (payabIe) (310) (9,465) 10,642 867
1ì. Ck!N kN0 0||0!|!! U|!N C|N!kk| 8kNK!
LvL 000's 31/12/2004 3l/l2/2003
Croup ßank Group 8ank
Cash 3l,l03 28,9l8 28,357 26,502
Deposlts wlth the 8ank of Latvla 34,346 34,346 32,5l5 32,5l5
Demand deposlts wlth other central banks 5,332 484 4,0l5 -
7otaI cash and deposits with centraI banks 70,781 63,748 64,887 59,017
Deposlts wlth the 8ank of Latvla and other central banks are due on demand. Deposlts wlth the 8ank of Latvla ln the amount
not exceedlng compulsory reserves bear lnterest set by the 8ank of Latvla for weekly deposlts. Deposlts wlth other central
banks ln the amount of LvL 484 thousand bear lnterest, whereas the remalnlng balance earns no lnterest.
Accordlng to the resolutlon of the Councll of the 8ank of Latvla, credlt lnstltutlons should comply wlth the compulsory reserve
requlrement calculated on the basls of attracted deposlts. Thls compulsory reserve must be exceeded by a credlt lnstltutlon's
average monthly LvL balance on lts correspondent account wlth the 8ank of Latvla. Durlng the reportlng year, the 8ank was ln
compllance wlth these requlrements of the 8ank of Latvla.
F-65
F-65
"//6"-3&1035
11. 8k|kNC|! 0U| |k0M Ck|0|! |N!!|!U!|0N!
LvL 000's 31/12/2004 3l/l2/2003
Croup ßank Group 8ank
Due from credlt lnstltutlons reglstered ln OLCD countrles 202,757 l94,322 6l,366 53,30l
Due from credlt lnstltutlons reglstered ln Latvla 24,9l7 23,02l 23,8l9 23,7l8
Due from credlt lnstltutlons reglstered ln other non-
OLCD countrles 87,4l8 l05,ll7 47,0l3 69,895
7otaI gross baIances due from credit institutions 315,092 322,460 132,198 146,914
Less provlslon for posslble credlt losses (see Note l0) (2,222) (2,20l) (2,l42) (2,l42)
7otaI net baIances due from credit institutions 312,870 320,259 130,056 144,772
As at 3l December 2004, the 8ank had lnter-bank deposlts wlth 4 Latvlan credlt lnstltutlons and 7 OLCD reglon credlt
lnstltutlons. Correspondlng balances comprlsed 85% and 73% of total balances due from credlt lnstltutlons reglstered ln Latvla
and OLCD, respectlvely.
The 8ank's balances wlth lts subsldlary 1BSFY#BOLBT (Llthuanla) accounted for 23% (40%) of the total balances due from credlt
lnstltutlons reglstered ln other non-OLCD countrles.
LvL 000's 31/12/2004 3l/l2/2003
Croup ßank Group 8ank
Correspondent accounts 62,73l 5l,400 45,408 38,l27
Overnlght deposlts 69,642 69,640 48,l52 5l,685
Total demand deposlts l32,373 l2l,040 93,560 89,8l2
7erm deposits with credit institutions:
due wlthln l month l62,880 l73,796 ll,78l 3l,483
due wlthln l - 3 months 760 2,ll6 5,69l 5,464
due wlthln 3 - 6 months 8,773 l4,82l 9,738 9,738
due wlthln 6 - l2 months 40l - - -
due wlthln l - 5 years 5,l60 6,790 5,5ll 5,480
over 5 years and undated 4,745 3,897 5,9l7 4,937
Total term deposlts l82,7l9 20l,420 38,638 57,l02
7otaI gross baIances due from credit institutions 315,092 322,460 132,198 146,914
Less provlslon for posslble credlt losses (see Note l0) (2,222) (2,20l) (2,l42) (2,l42)
7otaI net baIances due from credit institutions 312,870 320,259 130,056 144,772
Term deposlts, servlng as cash collateral, have been classlñed as PWFSZFBSTBOEVOEBUFE.
As at 3l December 2004, balances due from Latvlan and non-OLCD credlt lnstltutlons totalllng LvL 39,l88 thousand (2003: LvL
23,632 thousand) were classlñed as zero rlsk exposures, as collaterallsed by deposlts (see also Note 25).
F-66
F-66

11. |0kN! kN0 k0\kNC|! !0 CU!!0M|k!
LvL 000's 31/12/2004 3l/l2/2003
Croup ßank Group 8ank
Pegular loans 437,54l 374,09l 289,282 272,703
Utlllsed credlt llnes l30,8l8 l64,634 82,40l 77,630
Loans under reverse repurchase agreements 22,862 22,782 l9,299 l7,953
7otaI gross Ioans to customers 591,221 561,507 390,982 368,286
Plnance leases (see Note l5) 46,338 24,90l 34,920 27,990
Pactorlng 44,237 43,672 32,857 32,280
Deblt balances on settlement cards l3,876 l3,530 6,l57 6,06l
Due from lnvestment and brokerage flrms ll,95l ll,95l 8,448 8,448
Overdraft facllltles 6,964 6,705 l7,576 l7,l05
7otaI other Ioans and advances 123,366 100,759 99,958 91,884
7otaI gross Ioans and advances to customers 714,587 662,266 490,940 460,170
Less provlslon for posslble credlt losses (see Note l0) (22,894) (2l,9l7) (l5,334) (l4,628)
7otaI net Ioans and advances to customers 691,693 640,349 475,606 445,542
As at 3l December 2004, the 8ank has lssued student loans ln the total amount of LvL 4,7l2 thousand (2003: LvL 4,9ll thousand).
Student loans are lssued under the lnltlatlve of the Mlnlstry of Lducatlon of the Pepubllc of Latvla and the State Treasury. The State
Treasury has arranged the necessary fundlng and fully assumes all rlsks and rewards lncldent to these loans. Slnce the 8ank only
acts as an agent on behalf of the Mlnlstry of Lducatlon and State Treasury, the outstandlng balances of the aforementloned loans
and the correspondlng deposlts are not lncluded ln the 8ank's balance sheet.
As at 3l December 2004, loans and advances totalllng LvL 20,753 thousand (2003: LvL 26,7ll thousand) or 3% (2003: 5%) of
the Group's and the 8ank's total portfollo of net loans and advances to customers were classlñed as zero rlsk, as collaterallsed
by deposlts (see Notes 25 and 26).
The Latvlan banklng leglslatlon requlres that any credlt exposure to a non-related entlty may not exceed 25% of equlty as
deñned by the Plnanclal and Capltal Market Commlsslon (PCMC) (see Note 33) and the total credlt exposure to all related
partles, except for consolldated subsldlarles, may not exceed l5% of equlty as deñned by the PCMC. As at 3l December 2004,
the 8ank was ln compllance wlth the above requlrements.
The table below provldes the dlvlslon of outstandlng loans and advances to customers by maturlty proñle.
LvL 000's 31/12/2004 3l/l2/2003
Croup ßank Group 8ank
Overdue 9,8l2 9,335 9,948 9,502
FaIIing due within:
l month 36,704 34,387 48,84l 46,7l7
l - 3 months 27,364 23,835 ll,327 9,733
3 - 6 months 28,850 24,l29 9,6l4 5,796
6 - l2 months 29,02l l9,635 24,666 l9,305
l - 5 years 25l,82l 2l6,l59 l40,704 l39,ll2
more than 5 years 33l,0l5 334,786 245,840 230,005
7otaI gross Ioans and advances to customers 714,587 662,266 490,940 460,170
Less provlslon for posslble credlt losses (see Note l0) (22,894) (2l,9l7) (l5,334) (l4,628)
7otaI net Ioans and advances to customers 691,693 640,349 475,606 445,542
Currently, the 8ank's lnformatlon system does not provlde an analysls of outstandlng loans and advances to customers by
thelr remalnlng maturltles conslderlng the scheduled repayments durlng the perlod of loans. Due to extenslve enort requlred
ln preparatlon of such an analysls, the Management dld not deem presentatlon of such analysls ln these ñnanclal statements
practlcal. Accordlngly, the above table has been prepared under the assumptlon that all prlnclpal falls due at the ñnal maturlty
date.
F-67
F-67
"//6"-3&1035
Loans and advances by customer proñle may be speclñed as follows:
LvL 000's 31/12/2004 3l/l2/2003
Croup ßank Group 8ank
Government - - l8 l8
Local munlclpalltles 5,l45 3,409 5,0l7 3,400
State owned enterprlses 23,43l 22,426 l4,5ll l4,5ll
Munlclpallty owned enterprlses 29,029 29,029 23,984 23,648
Prlvately held companles 45l,845 438,393 30l,993 287,l3l
7otaI gross Ioans and advances to corporate
customers 509,450 493,257 345,523 328,708
Publlc and rellglous lnstltutlons l4,562 l4,440 l3,943 l3,943
Prlvate lndlvlduals l90,575 l54,569 l3l,474 ll7,5l9
7otaI gross Ioans and advances to customers 714,587 662,266 490,940 460,170
Less provlslon for posslble credlt losses (see Note l0) (22,894) (2l,9l7) (l5,334) (l4,628)
7otaI net Ioans and advances to customers 691,693 640,349 475,606 445,542
An lndustry analysls of the gross portfollo of loans and advances to corporate customers before provlslon for posslble credlt
losses may be speclñed as follows:
LvL 000's 31/12/2004 3l/l2/2003
Croup ßank Group 8ank
Transport and communlcatlons l74,3l2 l58,034 98,842 93,672
Peal estate management 75,896 65,l56 28,l60 27,32l
Trade 56,l73 47,8l2 54,7l2 47,576
Manufacturlng 45,l60 43,828 35,986 33,7l0
Plnanclal lntermedlatlon 42,038 77,348 36,l07 47,7ll
Llectrlclty, gas and water supply 35,900 35,536 30,508 29,398
Constructlon 29,780 24,800 l0,7l3 8,743
Hotels, restaurants and entertalnment l5,030 ll,874 l3,223 ll,79l
Agrlculture and forestry 4,349 4,0l3 l,744 l,465
Other lndustrles 30,8l2 24,856 35,528 27,32l
7otaI gross Ioans and advances to corporate
customers 509,450 493,257 345,523 328,708
The followlng table represents geographlcal proñle of the portfollo of loans and advances to customers analysed by the place
of customers' reported resldence:
LvL 000's 31/12/2004 3l/l2/2003
Croup ßank Group 8ank
OLCD reglon resldents 89,l83 85,686 58,0l5 57,424
Latvlan resldents 4l6,987 4l7,603 350,6l9 347,l24
Non-OLCD reglon resldents 208,4l7 l58,977 82,306 55,622
7otaI gross Ioans and advances to customers 714,587 662,266 490,940 460,170
Less provlslon for posslble credlt losses (see Note l0) (22,894) (2l,9l7) (l5,334) (l4,628)
7otaI net Ioans and advances to customers 691,693 640,349 475,606 445,542
F-68
F-68

1î. ||NkNC| ||k!|! 8\ !\|| 0| k!!|!!
LvL 000's 31/12/2004 3l/l2/2003
Croup ßank Group 8ank
Transport vehlcles 27,242 l3,254 l7,200 l2,830
Peal estate 8,577 8,577 ll,308 ll,308
Manufacturlng equlpment 942 942 l,583 l,578
Other 9,577 2,l28 4,829 2,274
7otaI present vaIue of finance Iease payments 46,338 24,901 34,920 27,990
1ã. UN|kkN|0 |N!|k|!! |NC0M| 0N ||NkNC| ||k!|!
LvL 000's 31/12/2004 3l/l2/2003
Croup ßank Group 8ank
Short-term unearned lncome l,822 l,l37 2,023 l,453
Long-term unearned lncome 3,248 l,950 3,322 2,8ll
7otaI unearned interest income on finance Ieases 5,070 3,087 5,345 4,264
1I. ||/|0 |NC0M| !|CUk|!||!
LvL 000's 31/12/2004 3l/l2/2003
Croup ßank Group 8ank
Government bonds 67,688 6l,67l 85,7l6 73,l39
Munlclpallty bonds l5,676 l5,324 l3,956 l3,936
Credlt lnstltutlon bonds l20,l73 ll5,352 l27,l03 l26,224
Corporate bonds 82,082 68,636 9l,529 83,l53
Other flnanclal lnstltutlon bonds 9,66l 9,66l 26,ll5 26,ll5
Managed funds l0,572 l0,572 l0,409 l0,409
7otaI gross fixed income securities 305,852 281,216 354,828 332,976
Less provlslon for flxed lncome securltles (see Note l0) (7,094) (7,094) (7,045) (7,045)
7otaI net fixed income securities 298,758 274,122 347,783 325,931
Managed funds represent the Group's share ln certaln portfollos of ñxed lncome securltles that are managed on behalf of
lnvestors by ñnanclal lnstltutlons reglstered ln OLCD countrles. The Group does not possess detalled lnformatlon on these
lnvestments, therefore they are not analysed by thelr ultlmate lssuer.
Plxed lncome securltles held by the Group and the 8ank are classlñed between held to maturlty, avallable for sale and held for
tradlng portfollo as follows:
LvL 000's 31/12/2004 3l/l2/2003
Croup ßank Group 8ank
Held for tradlng l7,850 l7,743 37,708 37,579
Avallable for sale 245,328 223,2l3 266,436 244,7l3
Held to maturlty 42,674 40,260 50,684 50,684
7otaI gross fixed income securities 305,852 281,216 354,828 332,976
Less provlslon for flxed lncome securltles (see Note l0) (7,094) (7,094) (7,045) (7,045)
7otaI net fixed income securltles 298,758 274,122 347,783 325,931
F-69
F-69
"//6"-3&1035
The Group's ñxed lncome securltles are further spllt as follows:
LvL 000's 31/12/2004 3l/l2/2003
Held to
maturlty
Avallable
for sale
Held for
tradlng
Total Held to
maturlty
Avallable
for sale
Held for
tradlng
Total
Government bonds l28 64,470 3,090 67,688 - 68,294 l7,422 85,7l6
Munlclpallty bonds 352 l5,2ll ll3 l5,676 - ll,435 2,52l l3,956
Credlt lnstltutlon bonds 32,935 85,777 l,46l l20,l73 4l,478 84,263 l,362 l27,l03
Corporate bonds 2,224 66,8l4 l3,044 82,082 l,644 73,574 l6,3ll 9l,529
Other flnanclal lnstltutlon
bonds - 9,5l9 l42 9,66l 54l 25,482 92 26,ll5
Managed funds 7,035 3,537 - l0,572 7,02l 3,388 - l0,409
7otaI gross fixed income
securities 42,674 245,328 17,850 305,852 50,684 266,436 37,708 354,828
The Group's lnvestments ln ñxed lncome securltles are analysed by llsted and unllsted securltles as follows:
31/12/2004 3l/l2/2003
Llsted Unllsted Total Llsted Unllsted Total
Covernment bonds:
Latvla 39,8l6 - 39,8l6 34,322 - 34,322
OLCD 5,l58 - 5,l58 l2,580 432 l3,0l2
Non-OLCD 22,7l4 - 22,7l4 38,382 - 38,382
Total government bonds 67,688 - 67,688 85,284 432 85,7l6
MunicipaIity bonds:
OLCD - - - 6,994 - 6,994
Non-OLCD l5,674 2 l5,676 6,960 2 6,962
Total munlclpallty bonds l5,674 2 l5,676 l3,954 2 l3,956
Credit institution bonds:
Latvla l,935 - l,935 2,8l2 - 2,8l2
OLCD 33,0l2 45,l94 78,206 57,l6l 38,504 95,665
Non-OLCD 20,4l7 l9,6l5 40,032 2l,828 6,798 28,626
Total credlt lnstltutlon bonds 55,364 64,809 l20,l73 8l,80l 45,302 l27,l03
Corporate bonds (OLCD and non-
OLCD) 56,843 25,239 82,082 89,l09 2,420 9l,529
Other flnanclal lnstltutlon bonds
(OLCD) 9,452 209 9,66l 8,805 l7,3l0 26,ll5
Managed funds - l0,572 l0,572 - l0,409 l0,409
7otaI gross fixed income securities 205,021 100,831 305,852 278,953 75,875 354,828
Less provlslon for flxed lncome
securltles (see Note l0) (l,745) (5,349) (7,094) (l,752) (5,293) (7,045)
7otaI net fixed income securities 203,276 95,582 298,758 277,201 70,582 347,783
As at 3l December 2003, government bonds wlth the carrylng value of LvL l5,l08 thousand were pledged as a securlty for the
8ank's repo loans due to the 8ank of Latvla ln the amount of LvL l5,000 thousand. As at 3l December 2004, there were no assets
pledged as a securlty for SFQP transactlons.
F-70
F-70

1ë. ||/|0 |NC0M| !|CUk|!||! 8\ Mk!Uk|!\ |k0||||
The followlng table provldes a maturlty proñle of the Group's ñxed lncome securltles as at 3l December 2004:
LvL 000's
wlthln
l month
l-3
months
3-6
months
6-l2
months
l-5
years
More
than
5 years
Total
portfollo
Government bonds - l,224 983 l84 l7,670 47,627 67,688
Munlclpallty bonds 2 - - - 2,454 l3,220 l5,676
Credlt lnstltutlon bonds 759 - 2,4ll 6,437 70,78l 39,785 l20,l73
Corporate bonds - 670 2,537 3,558 53,0ll 22,306 82,082
Other flnanclal lnstltutlon bonds - - - - 5,684 3,977 9,66l
Managed funds - - - - 9,009 l,563 l0,572
7otaI gross fixed income
securities 761 1,894 5,931 10,179 158,609 128,478 305,852
1º. !Nkk|! kN0 0!N|k N0Nʰ||/|0 |NC0M| !|CUk|!||!
LvL 000's 31/12/2004 3l/l2/2003
Croup ßank Group 8ank
Latvlan entltles' equlty shares
llsted 900 900 503 497
unllsted 45 39 4l 35
Porelgn entltles' equlty shares
llsted 3,l82 3,l66 3,ll4 3,l02
unllsted l07 93 l34 l2l
Managed funds 7,278 7,23l 6,l92 6,038
7otaI shares and other non-fixed income securities 11,512 11,429 9,984 9,793
|nvestments ln managed funds, where the Group does not possess sumclent lnformatlon on portfollos' composltlon between
ñxed lncome securltles and shares are classlñed as lnvestments ln shares and other non-ñxed lncome securltles.
The followlng table provldes the classlñcatlon of the Group's shares and other non-ñxed lncome securltles between avallable
for sale and held for tradlng portfollo:
3l/l2/2004 3l/l2/2003
Avallable
for sale
Held for
tradlng
Total Avallable
for sale
Held for
tradlng
Total
£quity shares:
ln Latvlan flnanclal lnstltutlons - 945 945 - - -
ln Latvlan corporate entltles - 509 509 l2 532 544
ln OLCD corporate entltles 67 737 804 64 27l 335
ln non-OLCD credlt lnstltutlons - l33 l33 - 30 30
ln non-OLCD corporate entltles - l,843 l,843 l6 2,867 2,883
Total equlty shares 67 4,l67 4,234 92 3,700 3,792
Managed funds - 7,278 7,278 - 6,l92 6,l92
7otaI shares and other non-fixed
income securities 67 11,445 11,512 92 9,892 9,984
Due to the fact that the Group does not possess a detalled enough speclñcatlon of lnvestments under managed funds, whlch
are managed on the behalf of lnvestors by ñnanclal lnstltutlons reglstered ln OLCD area, such lnvestments are not analysed by
thelr ultlmate lssuer.
F-71
F-71
"//6"-3&1035
ìê. |N\|!!M|N!! |N !U8!|0|kk||!
The 8ank's lnvestments ln subsldlarles are accounted ln the 8ank's stand-alone ñnanclal statements under the equlty method.
Movements ln the 8ank's lnvestments ln subsldlarles may be speclñed as follows:
LvL 000's 2004 2003
8alance as at l 1anuary 7,84l 5,320
Acqulsltlons and lnvestments l0,l78 l,482
Transfer to goodwlll (l,246) -
(Decrease)/ lncrease ln falr value revaluatlon reserve of subsldlary (l3) (l82)
Pevaluatlon l,609 l,22l
ßaIance as at 31 December 18,369 7,841
Durlng 2004, the 8ank acqulred l00% of the shares of "1 "OMBHF 1SJWBUCBOL "(, a Swlss bank. The acqulsltlon prlce was
LvL 9,678 thousand. The composltlon of acqulred assets and llabllltles were as follows:
Cash 3l
8alances due from credlt lnstltutlons 2,937
Plxed lncome securltles 5,486
Other assets 2l
Other llabllltles (43)
Net assets 8,432
|n 2004, the 8ank also lncreased lts lnvestment ln the l00% owned subsldlary, a/s 1BSFY "TTFU .BOBHFNFOU, by paylng ln
addltlonal share capltal ln the amount of LvL 500 thousand. A/s 1BSFY "TTFU .BOBHFNFOU used most of the new fundlng for
settlng up a l00% subsldlary ln Ukralne, 1BSFY"TTFU.BOBHFNFOU (Ukralne), wlth the lnvestment totalllng LvL 492 thousand. As
such, 1BSFY"TTFU.BOBHFNFOU (Ukralne) ls l00% lndlrectly owned by the 8ank.
F-72 F-72

As at 3l December 2004, the 8ank held the followlng lnvestments ln subsldlarles:
Company 8uslness proflle Share
capltal ln
LvL 000's
The
8ank's
share
(%)
% of
total
votlng
rlghts
|nvestment
value ln
LvL 000's
A8 1BSFY#BOLBT (Llthuanla) 8anklng 6,293 l00.0 l00.0 5,872
"1"OMBHF1SJWBUCBOL"(
(Swltzerland) 8anklng 4,550 l00.0 l00.0 8,l70
AS 1BSFYBULMŔUBJTQFOTJKVGPOET (Latvla) Penslon fund 450 99.6 99.6 450
AS 1BSFY"TTFU.BOBHFNFOU (Latvla) Plnance l,700 l00.0 l00.0 l,907
1BSFY"TTFU.BOBHFNFOU (Pussla) Plnance 558 l00.0 l00.0 -
1BSFY"TTFU.BOBHFNFOU (Ukralne) Plnance 492 l00.0 l00.0 -
UA8 1BSFY*OWFTUJDJKVWBMEZNBT
(Llthuanla) Plnance 447 l00.0 l00.0 l87
OU 1BSFY-FBTJOH'BDUPSJOH (Lstonla) Plnance 35l l00.0 l00.0 8l5
UA8 1BSFY'BLUPSJOHBTJS-J[JOHBT
(Llthuanla) Plnance 305 l00.0 l00.0 377
AS 1BSFYJFHVMEūKVNVQŔSWBMEFT
TBCJFESūCB (Latvla) Plnance l50 l00.0 l00.0 432
3FHBMJUF)PMEJOHTLtd. (Cyprus) Plnance 6 l00.0 l00.0 -
.#.*OWFTUNFOUT Ltd. (USA) Plnance l l00.0 l00.0 -
1BSFY(MPCBM0QQPSUVOJUJFT'VOE
(Netherlands Antllles) Plnance - l00.0 l00.0 -
UA8 1BSFY-J[JOHBT (Llthuanla) Leaslng 765 5l.0 5l.0 -
S|A 1BSFY-ū[JOHT (Latvla) Leaslng 3l l00.0 l00.0 -
S|A 1BSFYCSPLFSVTJTUŠNB (Latvla)
Custom brokerage
servlces l20 9l.7 9l.7 l59
1BSFY(SPVQ3FQSFTFOUBUJPO Ltd.
(Unlted Klngdom)
Pepresentatlve
offlce - l00.0 l00.0 -
7otaI investments in subsidiaries 18,369
The ñnanclal statements of a/s 1BSFYCBOLB and lts subsldlarles A8 1BSFY#BOLBT, "1"OMBHF1SJWBUCBOL"(, AS 1BSFYBULMŔUBJT
QFOTJKVGPOET, AS 1BSFY"TTFU.BOBHFNFOU, UA8 1BSFY*OWFTUJDJKVWBMEZNBT, OU 1BSFY-FBTJOH'BDUPSJOH, UA8 1BSFY'BLUPSJOHBTJS
-J[JOHBT, AS 1BSFYJFHVMEūKVNVQŔSWBMEFTTBCJFESūCB, S|A 1BSFY-ū[JOHT, S|A 1BSFYCSPLFSVTJTUŠNB, and lndlrectly controlled entltles
1BSFY"TTFU.BOBHFNFOU (Pussla) and 1BSFY"TTFU.BOBHFNFOU (Ukralne) are consolldated ln the Group's ñnanclal statements on
a llne by llne basls by addlng together llke ltems of assets and llabllltles as well as lncome and expenses.
The Group's lnvestments ln subsldlarles represent lnvestments ln unconsolldated subsldlarles. As at 3l December 2003, the
Group's lnvestments comprlsed lnvestment ln UA8 1BSFY-J[JOHBT ln the amount of LvL 4l9 thousand. As at 3l December 2004,
thls lnvestment has been fully wrltten on.
However, as a result of reorganlsatlon wlthln 1BSFY Group, the Management have resolved to cease operatlons of UA8 1BSFY
-J[JOHBT and move the company lnto llquldatlon, therefore lt was not consldered approprlate by the Management to
consolldate UA8 1BSFY-J[JOHBT ln the ñnanclal statements of 1BSFY Group for the years ended 3l December 2004 and 2003. The
enect on the Group's ñnanclal statements arlslng from the excluslon of UA8 1BSFY-J[JOHBT from the consolldatlon ls deemed
lmmaterlal.
The Management have assessed the Group's outstandlng exposure to non-consolldated subsldlarles and have determlned to
establlsh a provlslon on the outstandlng loan balances ln the amount of LvL 2,228 thousand as a charge to the statement of
lncome of the reportlng perlod (2003: LvL 2,385 thousand), as well as fully wrlte-on lnvestment ln the subsldlary.
F-73
F-73
"//6"-3&1035
ì1. |N!kNû|8|| k!!|!!
LvL 000's 31/12/2004 3l/l2/2003
Croup ßank Group 8ank
CoodwiII from acquisition of subsidiaries:
"1"OMBHF1SJWBUCBOL"( l,246 l,246 - -
A8 1BSFY#BOLBT 35 35 l73 l73
S|A 1BSFY-ū[JOHT l23 l23 246 246
l,404 l,404 4l9 4l9
Software l,994 l,8l7 2,l73 2,036
Other lntanglble assets l5 l4 2l l8
Total lntanglble assets excludlng prepayments 3,4l3 3,235 2,6l3 2,473
Prepayments for lntanglble assets 84 83 32 32
7otaI net book vaIue of intangibIe assets 3,497 3,318 2,645 2,505
Movements ln the Group's lntanglble assets excludlng prepayments for the year ended 3l December 2004 can be speclñed as
follows:
LvL 000's
Goodwlll from
acqulsltlon of
subsldlarles
Software Other lntanglble
assets
Total lntanglble
assets excludlng
prepayments
HistoricaI cost
As at l 1anuary 2004 l,306 4,746 36 6,088
Addltlons l,246 844 3 2,093
Dlsposals - - (2) (2)
As at 31 December 2004 2,552 5,590 37 8,179
AccumuIated amortisation
As at l 1anuary 2004 887 2,573 l5 3,475
Charge for the year 26l l,023 9 l,293
Peversal due to dlsposals - - (2) (2)
As at 31 December 2004 1,148 3,596 22 4,766
Net book vaIue
As at l 1anuary 2004 4l9 2,l73 2l 2,6l3
As at 31 December 2004 1,404 1,994 15 3,413
F-74
F-74

'*9&%"44&54
LvL 000's 31/12/2004 3l/l2/2003
Croup ßank Group 8ank
Leasehold lmprovements l,787 l,787 l,308 l,308
Land and bulldlngs l0,875 8,276 l0,956 8,3l5
Transport vehlcles 2,524 2,230 2,325 2,l72
Other flxed assets 7,75l 6,946 8,l40 7,235
Total flxed assets excludlng prepayments 22,937 l9,239 22,729 l9,030
Prepayments for flxed assets 232 2l3 l99 l99
7otaI net book vaIue of fixed assets 23,169 19,452 22,928 19,229
The followlng changes ln the Group's ñxed assets excludlng prepayments for ñxed assets took place durlng the year ended 3l
December 2004:
LvL 000's
Leasehold
|mpro-
vements
Land and
bulldlngs
Transport
vehlcles
Other flxed
assets
Total flxed
assets excludlng
prepayments
HistoricaI cost
As at l 1anuary 2004 l,93l l2,257 4,423 2l,693 40,304
Addltlons 924 309 965 3,264 5,462
Dlsposals - (l76) (59l) (3l6) (l,083)
As at 31 December 2004 2,855 12,390 4,797 24,641 44,683
AccumuIated depreciation
As at l 1anuary 2004 623 l,30l 2,098 l3,553 l7,575
Charge for the year 445 2l7 7l9 3,644 5,025
Peversal due to dlsposals - (3) (544) (307) (854)
As at 31 December 2004 1,068 1,515 2,273 16,890 21,746
Net book vaIue
As at l 1anuary 2004 l,308 l0,956 2,325 8,l40 22,729
As at 31 December 2004 1,787 10,875 2,524 7,751 22,937
The followlng changes ln the 8ank's ñxed assets excludlng prepayments for ñxed assets took place durlng the year ended 3l
December 2004:
LvL 000's
Leasehold
|mpro-
vements
Land and
bulldlngs
Transport
vehlcles
Other flxed
assets
Total flxed
assets excludlng
prepayments
HistoricaI cost
As at l 1anuary 2004 l,93l 9,5l0 4,l85 l9,892 35,5l8
Addltlons 924 3ll 788 3,020 5,043
Dlsposals - (l76) (59l) (20l) (968)
As at 31 December 2004 2,855 9,645 4,382 22,711 39,593
AccumuIated depreciation
As at l 1anuary 2004 623 l,l95 2,0l3 l2,657 l6,488
Charge for the year 445 l77 683 3,307 4,6l2
Peversal due to dlsposals - (3) (544) (l99) (746)
As at 31 December 2004 1,068 1,369 2,152 15,765 20,354
Net book vaIue
As at l 1anuary 2004 l,308 8,3l5 2,l72 7,235 l9,030
As at 31 December 2004 1,787 8,276 2,230 6,946 19,239
F-75
F-75
"//6"-3&1035
ì1. |k||k\M|N!! kN0 kCCkU|0 |NC0M|
LvL 000's 31/12/2004 3l/l2/2003
Croup ßank Group 8ank
Accrued lnterest lncome 6,547 6,237 4,058 3,925
Prepayments 3,298 3,280 2,864 2,838
Other accrued lncome l46 l46 - -
7otaI gross prepayments and accrued income 9,991 9,663 6,922 6,763
Less provlslon for posslble credlt losses (see Note l0) (l,657) (l,657) (l,l50) (l,l50)
7otaI prepayments and accrued income 8,334 8,006 5,772 5,613
ì1. 0!N|k k!!|!!
LvL 000's 31/12/2004 3l/l2/2003
Croup ßank Group 8ank
Prepald corporate lncome tax 729 657 - -
4QPU exchange contracts 337 337 3l8 3l8
Pepossessed assets for sale 223 l85 255 2l9
Other assets l,304 l,ll5 2,680 l,235
7otaI gross other assets 2,593 2,294 3,253 1,772
Less provlslon for posslble credlt losses (see Note l0) (l3l) (l04) (l73) (l05)
7otaI net other assets 2,462 2,190 3,080 1,667
ìî. 8k|kNC|! 0U| !0 Ck|0|! |N!!|!U!|0N! kN0 C|N!kk| 8kNK!
LvL 000's 31/12/2004 3l/l2/2003
Croup ßank Group 8ank
Due to credlt lnstltutlons reglstered ln OLCD countrles 86,077 83,l00 35,202 35,202
Due to credlt lnstltutlons reglstered ln Latvla 25,l03 24,804 44,222 44,222
Due to credlt lnstltutlons reglstered ln other non-OLCD
countrles 6l,070 54,759 26,730 24,76l
7otaI baIances due to credit institutions and centraI
banks 172,250 162,663 106,154 104,185
The followlng table presents the Group's balances due to credlt lnstltutlons accordlng to maturlty proñle:
LvL 000's
Due to credlt lnstltutlons reglstered ln:
OLCD
countrles
Latvla Other
countrles
Total
3l/l2/2004
Total
3l/l2/2003
8alances on demand 79 l5,270 29,l65 44,5l4 28,304
Overnlght deposlts - 6,000 - 6,000 22,678
Total balances repayable on demand 79 2l,270 29,l65 50,5l4 50,982
Loans from credit institutions:
due wlthln l month - 3,238 30,304 33,542 2l,243
due wlthln l - 3 months 3,360 595 l2 3,967 282
due wlthln 3 - 6 months 360 - - 360 32,056
due wlthln 6 - l2 months 82,25l - l,056 83,307 l,562
due wlthln l - 5 years 27 - 533 560 29
Total loans from credlt lnstltutlons 85,998 3,833 3l,905 l2l,736 55,l72
7otaI due to credit institutions 86,077 25,103 61,070 172,250 106,154
On 22 1uly 2004, the 8ank recelved a syndlcated loan from OLCD countrles' banks maturlng on 8 1uly 2005 and bearlng an
lnterest rate of l month L|8OP plus a margln of 0.70% per annum. The outstandlng balance of the syndlcated loan, amountlng
to LUP ll7,000 thousand (2003: LUP 47,000 thousand), comprlses 99% (2003: 90%) of the 8ank's total balances due to credlt
lnstltutlons reglstered ln OLCD countrles as at 3l December 2004.
F-76
F-76

As at 3l December 2004, the 8ank had outstandlng balances due to 7 credlt lnstltutlons reglstered ln Latvla and 4 credlt
lnstltutlons reglstered ln other non-OLCD countrles. The above deposlts comprlsed 79% and 85% of the total balances due to
credlt lnstltutlons reglstered ln Latvla and ln other non-OLCD countrles, respectlvely.
As at 3l December 2004, the 8ank held restrlcted balances due to credlt lnstltutlons amountlng to LvL 42,284 thousand (2003:
LvL 30,282 thousand) that are dependent upon the repayment of outstandlng balances due from credlt lnstltutlons and loans
and advances to customers.
ìã. 0||0!|!! |k0M CU!!0M|k!
LvL 000's 31/12/2004 3l/l2/2003
Croup ßank Group 8ank
Demand deposlts 874,764 840,648 707,385 685,933
7erm deposits:
due wlthln l month 68,69l 65,96l 27,342 23,050
due wlthln l - 3 months 33,239 29,695 32,439 28,99l
due wlthln 3 - 6 months 45,229 42,605 23,878 2l,207
due wlthln 6 - l2 months 67,l64 64,689 l9,l26 l6,902
due wlthln l - 5 years l5,204 l3,385 l7,994 l7,476
due ln more than 5 years l,280 l,273 7,42l 7,4l9
Total term deposlts 230,807 2l7,608 l28,200 ll5,045
7otaI deposits from customers 1,105,571 1,058,256 835,585 800,978
The followlng table presents deposlts from customers accordlng to customer proñle:
LvL 000's 31/12/2004 3l/l2/2003
Croup ßank Group 8ank
Government 26,523 26,523 7,853 7,853
Munlclpalltles l5,360 l5,360 l0,944 l0,944
Plnanclal lnstltutlons l4,769 l7,090 l4,427 l5,96l
State owned enterprlses 9,547 8,696 7,598 5,900
Publlc and rellglous lnstltutlons 8,323 7,96l ll,835 ll,65l
Prlvately held companles 765,346 733,750 596,540 576,l48
Prlvate lndlvlduals 265,703 248,876 l86,388 l72,52l
7otaI deposits from customers 1,105,571 1,058,256 835,585 800,978
The followlng table provldes the spllt of deposlts from customers by thelr place of resldence.
LvL 000's 31/12/2004 3l/l2/2003
Croup ßank Group 8ank
Latvlan resldents 3l7,763 3l9,l89 2l6,7l5 2l8,054
Non-resldents 787,808 739,067 6l8,870 582,924
7otaI deposits from customers 1,105, 571 1,058,256 835,585 800,978
As at 3l December 2004, the 8ank held restrlcted deposlts amountlng to LvL l8,390 thousand (2003: LvL 20,06l thousand) that
are dependent upon repayment of outstandlng balances due from customers.
F-77
F-77
"//6"-3&1035
ìI. |k0\|!|0N |0k ||k8|||!||! kN0 CNkkû|!
LvL 000's 31/12/2004 3l/l2/2003
Croup ßank Group 8ank
Deferred corporate lncome tax llablllty (see Note ll) 905 90l 766 76l
Provlslons for memorandum ltems 56 56 2l 2l
7otaI provision for IiabiIities and charges 961 957 787 782
ìë. 0!N|k ||k8|||!||!
LvL 000's 31/12/2004 3l/l2/2003
Croup ßank Group 8ank
Suspense llabllltles l,502 l,50l l,0l9 l,0l9
4QPU exchange contracts 297 304 426 426
Money ln translt 7,l58 3,952 3,42l 30l
Other llabllltles 2,69l l,8l7 2,35l l,226
7otaI other IiabiIities 11,648 7,574 7,217 2,972
Suspense llabllltles comprlse funds recelved by the Group and the 8ank as at year end, but not transferred to ultlmate
beneñclarles due to unclear or lncomplete detalls of the supportlng documentatlon.
ìº. |k|0ʰ|N !Nkk| Ck||!k|
As at 3l December 2004, the 8ank's reglstered and pald-ln share capltal was LvL 65,027 thousand. |n accordance wlth the 8ank's
statutes, the share capltal conslsts of 60,633 thousand ordlnary shares wlth votlng rlghts and 4,394 thousand ordlnary shares
wlthout votlng rlghts. All shares have a par value of LvL l each and, as at 3l December 2004, they all were lssued and fully pald.
As at 3l December 2004, the 8ank dld not possess any of lts own shares.
As at 3l December 2004, the 8ank had 69 (62) shareholders. The respectlve shareholdlngs as at 3l December 2004 and 2003
may be speclñed as follows:
31/12/2004 3l/l2/2003
Pald-ln
share capltal
(LvL 000's)
% of total
pald-ln
capltal
% of total
votlng
rlghts
Pald-ln
share capltal
(LvL 000's)
% of total
pald-ln
capltal
% of total
votlng
rlghts
valery Kargln 27,887 42.89 45.99 27,887 44.04 45.99
vlktor Krasovltsky 27,887 42.89 45.99 27,887 44.04 45.99
Other 9,253 l4.22 8.02 7,553 ll.92 8.02
7otaI 65,027 100.00 100.00 63,327 100.00 100.00
Durlng 2004 and 2003, the 8ank made several closed share lssues, where shares were onered to selected external lnvestors:
Date of closlng the share
lssue
Number of shares lssued
000's
Share lssue
prlce LvL
Contrlbutlon
to share capltal
LvL 000's
Contrlbutlon to
share premlum
LvL 000's
l 1uly 2003 2,972 wlth votlng rlghts 2.l0 2,972 3,269
l5 December 2003 l,886 wlth votlng rlghts 2.43 l,886 2,697
2,694 wlthout votlng rlghts 2.2l 2,694 3,260
l0 November 2004 l,700 wlthout votlng rlghts 3.04 l,700 3,468
All lssued shares were pald ln by cash contrlbutlons.
F-78
F-78

1ê. M|M0kkN0UM |!|M!
Memorandum ltems comprlse contlngent llabllltles, ñnanclal commltments, forelgn exchange contracts and derlvatlve ñnanclal
lnstruments. The followlng table provldes a speclñcatlon of contlngent llabllltles and ñnanclal commltments outstandlng as at
3l December 2004 and 2003.
LvL 000's 31/12/2004 3l/l2/2003
Croup ßank Group 8ank
Contingent IiabiIities:
Outstandlng guarantees 2l,28l 2l,269 6,9l5 6,l60
Outstandlng letters of credlt 4,6l9 4,6l9 6,729 6,330
7otaI contingent IiabiIities 25,900 25,888 13,644 12,490
FinanciaI commitments:
Loans granted not fully drawn down 26,730 23,l93 34,754 33,593
Unutlllsed credlt llnes and overdraft facllltles 80,495 86,56l 54,l22 57,767
Credlt card commltments l8,065 l8,065 8,450 8,450
Other flnanclal commltments 6 6 7 7
FinanciaI commitments 125,296 127,825 97,333 99,817
The followlng table presents the notlonal amounts and falr values of forelgn exchange contracts and derlvatlve ñnanclal
lnstruments. The notlonal amounts of forelgn exchange contracts represent the amounts payable under these contracts. The
notlonal amounts of other ñnanclal lnstruments represent the value of the underlylng assets.
LvL 000's Notlonal amount Palr value
3l/l2/2004 3l/l2/2003 3l/l2/2004 3l/l2/2003
Croup ßank Group 8ank Croup ßank Group 8ank
Foreign exchange contracts:
Spot exchange 93,0l9 92,878 287,77l 287,698 40 33 (l08) (l08)
Porwards l82,884 l84,0ll ll6,37l l29,883 (724) (720) (2l4) (2l5)
Swaps 529,098 539,856 278,5l5 296,9l7 (l,322) (l,329) (l,402) (l,430)
7otaI foreign exchange
contracts 805,001 816,745 682,657 714,498 (2,006) (2,016) (1,724) (1,753)
Dther financiaI instruments:
Putures, sold 8,242 8,242 23,549 23,549 (l5) (l5) (332) (332)
|nterest rate swaps l7,350 l7,350 - - l56 l56 - -
7otaI other financiaI
instruments 25,592 25,592 23,549 23,549 141 141 (332) (332)
The falr value on forelgn exchange contracts ls presented ln balance sheet as follows:
LvL 000's Assets Llabllltles
3l/l2/2004 3l/l2/2003 3l/l2/2004 3l/l2/2003
Croup ßank Group 8ank Croup ßank Group 8ank
Other assets 337 337 3l8 3l8 (297) (304) (426) (426)
Derlvatlve flnanclal
lnstruments l,405 l,4l4 l,492 l,505 (3,3l0) (3,322) (3,440) (3,482)
7otaI 1,742 1,751 1,810 1,823 (3,607) (3,626) (3,866) (3,908)
The followlng table represents geographlcal proñle of the Group's memorandum ltems based on the customer's/ counter
party's reported resldence as at 3l December 2004:
F-79
F-79
"//6"-3&1035
LvL 000's
OLCD
countrles
Latvla Other
non-OLCD
countrles
Total
Contingent IiabiIities:
Outstandlng guarantees l,889 l4,626 4,766 2l,28l
Outstandlng letters of credlt 809 l,820 l,990 4,6l9
7otaI contingent IiabiIities 2,698 16,446 6,756 25,900
FinanciaI commitments:
Loans granted not fully drawn down 6,223 l4,9l2 5,595 26,730
Unutlllsed credlt llnes and overdraft facllltles 2,580 62,468 l5,447 80,495
Credlt card commltments 642 l6,l25 l,298 l8,065
Other flnanclal commltments - - 6 6
FinanciaI commitments 9,445 93,505 22,346 125,296
Foreign exchange contracts:
Spot exchange 72,205 l2,442 8,372 93,0l9
Porwards l06,960 4l,8l5 34,l09 l82,884
Swaps 238,943 82,023 208,l32 529,098
7otaI foreign exchange contracts 418,108 136,280 250,613 805,001
Putures, sold 8,242 - - 8,242
|nterest rate swaps l7,350 - - l7,350
7otaI other financiaI instruments 25,592 - - 25,592
11. |UN0! UN0|k !kU!! MkNkû|M|N!
Under |PPS, funds managed by a trustee on behalf of lndlvlduals, trusts and other lnstltutlons are not regarded as assets of the
trustee and, therefore, are not lncluded ln lts balance sheet.
The table below provldes analysls of the funds managed on behalf of customers by lnvestment type:
LvL 000's 31/12/2004 3l/l2/2003
Croup ßank Group 8ank
Fixed income securities:
Government bonds 7,625 - 2,586 l6
Porelgn munlclpallty bonds l,364 30 269 35
Credlt lnstltutlon bonds 3,850 - l,243 63
Corporate bonds l7,7l7 - 2,090 340
Other flnanclal lnstltutlon bonds l23 - 63 -
Managed funds l,78l 22 223 -
7otaI investments in fixed income securities 32,460 52 6,474 454
Dther investments:
Deposlts wlth credlt lnstltutlons 2,676 - - -
Loans to corporate entltles l29,30l l29,30l - -
Loans to flnanclal lnstltutlons - 2,064 - -
Peal estate 2,295 - 99l -
Shares 3,l48 4l2 2,706 2,536
Other 634 - - -
7otaI other investments 138,054 131,777 3,697 2,536
7otaI assets under trust management agreements 170,514 131,829 10,171 2,990
F-80
F-80

The table below provldes an analysls of the customer proñle on whose behalf the funds are managed:
LvL 000's 31/12/2004 3l/l2/2003
Croup ßank Group 8ank
Prlvately held companles l44,475 l29,725 2,492 2,492
Prlvate lndlvlduals ll,328 40 3,893 498
|nvestors of lnvestment funds l2,l69 - 3,786 -
Porelgn flnanclal lnstltutlons - 2,064 - -
Other flnanclal lnstltutlons 2,542 - - -
7otaI IiabiIities under trust management agreements 170,514 131,829 10,171 2,990
1ì. Ck!N kN0 Ck!N |0U|\k||N!!
The table below provldes a breakdown of cash and cash equlvalents as at 3l December 2004 and 2003:
LvL 000's 31/12/2004 3l/l2/2003
Croup ßank Group 8ank
Cash and demand deposlts wlth central banks 70,78l 63,748 64,887 59,0l7
Demand deposlts wlth other credlt lnstltutlons l32,373 l2l,040 93,560 89,8l2
Demand deposlts due to other credlt lnstltutlons (50,5l4) (49,745) (50,982) (50,649)
7otaI cash and cash equivaIents 152,640 135,043 107,465 98,180
11. Ck||!k| k0|0UkC\
Capltal adequacy refers to the sumclency of the Group's capltal resources to cover the credlt rlsks and market rlsks arlslng from
the portfollo of assets and the on-balance sheet exposures.
Up untll November 2004, the Plnanclal and Capltal Markets Commlsslon, the bank regulator, requlred Latvlan banks to malntaln
a capltal adequacy ratlo based on ñnanclal statements prepared under Latvlan accountlng standards of l0% of rlsk welghted
assets. |n November 2004, the aforementloned requlrement has been decreased to 8%.
Slnce the 8ank has subsldlarles, whlch are ñnanclal lnstltutlons, lt should comply wlth the regulatory requlrements based on
both the Group's ñnanclal statements and the 8ank's ñnanclal statements as a stand-alone entlty. As at 3l December 2004, the
Group's capltal adequacy ratlo ln accordance wlth the PCMC's requlrements was ll.9% (2003: l3.0%). At the same tlme, the
8ank's capltal adequacy ratlo wlthout taklng lnto account the 8ank's lnvestments ln subsldlarles and calculated ln accordance
wlth the PCMC's requlrements was l2.5% (2003: l3.7%).
As at 3l December 2004, the Group's capltal adequacy ratlo based on 8asle Commlttee guldellnes was l2.2% (2003: l3.6%),
whereas the 8ank's capltal adequacy ratlo wlthout taklng lnto account the 8ank's lnvestments ln subsldlarles was l2.8% (2003:
l4.2%). The mlnlmum capltal adequacy recommended by the l988 8asle Commlttee guldellnes ls 8%.
F-81
F-81
"//6"-3&1035
The equlty to be utlllsed ln the capltal adequacy ratlo as at 3l December 2004 has been calculated as follows:
LvL 000's
Croup ßank
7ier 1
- pald-ln share capltal 65,027 65,027
- share premlum l2,694 l2,694
- legal and other reserves - -
- general banklng rlsk reserve (approprlated from retalned earnlngs) - -
- audlted retalned earnlngs (not subìect to dlvldend dlstrlbutlon) 28,334 28,334
- audlted proflt for the year (not subìect to dlvldend dlstrlbutlon) l6,452 l6,452
- mlnorlty lnterest l3 -
Less
- total amount of preference shares - -
- accumulated deflclt - -
- own shares held - -
- lntanglble assets (as deflned by PCMC) (3,497) (3,3l8)
- loss for the year - -
7otaI 7ier 1 119,023 119,189
7ier 2
- subordlnated capltal (restrlcted to 50% of Tler l) - -
- flxed asset revaluatlon reserve (restrlcted to 70%) - -
- falr value revaluatlon reserve (restrlcted to 55%) 2,l27 2,l27
7otaI 7ier 2 2,127 2,127
Less lnvestments ln flnanclal lnstltutlons, not subìect to consolldated supervlslon - -
£quity to be utiIised in the capitaI adequacy ratio as per FCMC 121,150 121,316
AdditionaI 7ier 1
- lntanglble assets (except goodwlll) 2,093 l,9l4
AdditionaI 7ier 2
- general provlslon for posslble credlt losses (restrlcted to l.25% of rlsk welghted
assets) 5,356 5,l27
£quity to be utiIised in the capitaI adequacy ratio as per the ßasIe Committee
guideIines 128,599 128,357
Purthermore, the total of Tler 2 may not exceed the total of Tler l.
F-82
F-82

The followlng table shows assets and memorandum ltems credlt rlsk welghtlngs, as well as other capltal charges used ln the
calculatlon of the capltal adequacy ratlo accordlng to the PCMC's requlrements:
$BQJUBMBEFRVBDZVOEFSUIF'$.$T
SFRVJSFNFOUT
Credlt
equl-
valent
Plsk
welg-
htlng
8alance
ln LvL 000's
Plsk welghted balance
LvL 000's
Group 8ank Group 8ank
Risk weighted assets:
Tradlng portfollo assets` - 30,699 30,529 - -
|ntanglble assets`` - 3,497 3,3l8 - -
0% rlsk welghtlng 0% 200,708 l92,266 - -
20% rlsk welghtlng 20% 3l6,6l6 300,556 63,323 60,lll
50% rlsk welghtlng 50% 66,685 66,667 33,342 33,334
l00% rlsk welghtlng l00% 806,276 769,320 806,276 769,320
7otaI assets 1,424,481 1,362,656 902,941 862,765
Dutstanding guarantees, Ietters of credit and financiaI commitments
Pevocable commltments - l8,235 l8,235 - -
Zero rlsk welghted 0% l5,404 l5,404 - -
20% rlsk welghted 50% 20% l4,400 l4,400 l,440 l,440
20% rlsk welghted l00% 20% 8l3 4,328 l63 866
50% rlsk welghted 50% 50% l,828 l,828 457 457
l00% rlsk welghted 50% l00% 87,89l 90,420 43,946 45,2l0
l00% rlsk welghted l00% l00% l2,625 9,098 l2,625 9,098
7otaI memorandum items 151,196 153,713 58,631 57,071
7otaI risk weighted assets and
memorandum items 961,572 919,836
Total credlt rlsk's capltal charge 8% 76,926 73,587
Porelgn currency open posltlons
subìect to capltal charge l,206 l,044
Plxed lncome securltles posltlon rlsk's
capltal charge l,462 l,453
Lqulty posltlon rlsk's capltal charge l,447 l,438
Derlvatlves counterparty rlsk's capltal
charges l29 l29
7otaI capitaI charges 81,170 77,651
£quity to be utiIised in the capitaI
adequacy ratio 121,150 121,316
CapitaI Adequacy Ratio
(£quity/7otaI capitaI charges) x 8% 11.9% 12.5%
` Capltal charges for ñxed lncome securltles and shares lncluded ln the tradlng portfollo have been calculated under ñxed
lncome securltles and equlty posltlon rlsk capltal charge.
`` Deducted from equlty.
F-83
F-83
"//6"-3&1035
8ased on the guldellnes set forth by the 8asle Commlttee, the capltal adequacy has been calculated as follows:
$BQJUBMBEFRVBDZVOEFSUIF#BTMFT
SFRVJSFNFOUT
Credlt
equl-
valent
Plsk
welgh-
tlng
8alance
ln LvL 000's
Plsk welghted balance
LvL 000's
Group 8ank Group 8ank
Risk weighted assets:
Tradlng portfollo assets` - 30,699 30,529 - -
Goodwlll`` - l,404 l,404 - -
0% rlsk welghtlng 0% 200,708 l92,266 - -
20% rlsk welghtlng 20% 284,498 272,070 56,900 54,4l4
50% rlsk welghtlng 50% 63,387 63,387 3l,694 3l,694
l00% rlsk welghtlng l00% 843,785 803,000 843,785 803,000
7otaI assets 1,424,481 1,362,656 932,379 889,108
Dutstanding guarantees, Ietters of credit and financiaI commitments
Pevocable commltments - l8,235 l8,235 - -
Zero rlsk welghted 0% l5,404 l5,404 - -
50% rlsk welghted 50% 50% l,828 l,828 457 457
l00% rlsk welghted 50% l00% l02,29l l04,820 5l,l46 52,4l0
l00% rlsk welghted l00% l00% l3,438 l3,426 l3,438 l3,426
7otaI memorandum items 151,196 153,713 65,041 66,293
7otaI risk weighted assets and
memorandum items 997,420 955,401
Total credlt rlsk's capltal charge 8% 79,794 76,432
Porelgn currency open posltlons
subìect to capltal charge l,206 l,044
Plxed lncome securltles posltlon rlsk's
capltal charge l,462 l,453
Lqulty posltlon rlsk's capltal charge l,447 l,438
Derlvatlves counterparty rlsk's capltal
charges l29 l29
7otaI capitaI charges 84,038 80,496
£quity to be utiIised in the capitaI
adequacy ratio 128,599 128,357
CapitaI Adequacy Ratio
(£quity/7otaI capitaI charges) x 8% 12.2% 12.8%
` Capltal charges for ñxed lncome securltles and shares lncluded ln the tradlng portfollo have been calculated under ñxed
lncome securltles and equlty posltlon rlsk capltal charge.
`` Deducted from equlty.
F-84
F-84

11. k!!|!!, ||k8|||!||! kN0 M|M0kkN0UM |!|M!
8\ Mk!Uk|!\ !!kUC!Uk|
The relatlonshlp between the maturlty of assets and llabllltles as well as memorandum ltems ls lndlcatlve of llquldlty rlsk and
the extent to whlch lt may be necessary to ralse funds to meet outstandlng obllgatlons. The table below allocates the Group's
assets, llabllltles and memorandum ltems to maturlty grouplngs based on the tlme remalnlng from the balance sheet date to
the contractual maturlty dates.
LvL 000's
wlthln
l month
l - 3
months
3 - 6
months
6 - l2
months
l - 5
years
Over 5
years
and
undated
Total
Assets
Cash and deposlts wlth
central banks 70,78l - - - - - 70,78l
8alances due from credlt
lnstltutlons 293,03l 760 8,773 40l 5,l60 4,745 3l2,870
Loans and advances to
customers 35,663 27,239 26,28l 28,777 247,876 325,857 69l,693
Plxed lncome securltles 76l l,894 5,93l l0,l79 l5l,860 l28,l33 298,758
Shares and other non-
flxed lncome securltles - - - - - ll,5l2 ll,5l2
Derlvatlve flnanclal
lnstruments 654 539 35 22 l55 - l,405
|ntanglble assets - - - - - 3,497 3,497
Plxed assets - - - - - 23,l69 23,l69
Prepayments and accrued
lncome 5,43l l53 - - - 2,750 8,334
Other assets 724 38l 6l 2l2 878 206 2,462
7otaI assets 407,045 30,966 41,081 39,591 405,929 499,869 1,424,481
LiabiIities
8alances due to credlt
lnstltutlons and central
banks 84,056 3,967 360 83,307 560 - l72,250
Deposlts from customers 943,455 33,239 45,229 67,l64 l5,204 l,280 l,l05,57l
Derlvatlve flnanclal
lnstruments 2,765 45l 92 2 - - 3,3l0
Accrued expense and
deferred lncome 2,546 l95 389 252 972 - 4,354
Provlslon for llabllltles and
charges 56 - - - - 905 96l
Other llabllltles l0,6ll 636 95 - lll l95 ll,648
7otaI IiabiIities 1,043,489 38,488 46,165 150,725 16,847 2,380 1,298,094
Mlnorlty lnterest - - - - - l3 l3
Shareholders' equlty - - - - - l26,374 l26,374
7otaI IiabiIities and
sharehoIders' equity 1,043,489 38,488 46,165 150,725 16,847 128,767 1,424,481
Memorandum items
Contlngent llabllltles 22,569 l,787 9l6 628 - - 25,900
Plnanclal commltments l25,296 - - - - - l25,296
Currently, the Group's and 8ank's lnformatlon system does not provlde an analysls of outstandlng loans and advances to
customers by thelr remalnlng maturltles conslderlng the scheduled repayments durlng the perlod of loans. Due to extenslve
enort requlred ln preparatlon of such an analysls, presentatlon of such analysls ln these ñnanclal statements was not deemed
practlcal by the Management. Accordlngly, the above table has been prepared under the assumptlon that all prlnclpal falls due
at the ñnal maturlty date.
F-85
F-85
"//6"-3&1035
1î. k||k|C|Nû Mk!Uk|!\ 0| k!!|!! kN0 ||k8|||!||!
|nterest rate rlsk ls the sensltlvlty of the ñnanclal posltlon of the 8ank and lts subsldlarles to the change ln market lnterest
rates. |n the normal course of buslness, the 8ank and lts subsldlarles encounter lnterest rate rlsk as a result of dlnerences wlthln
maturltles or lnterest re-ñxlng dates of respectlve lnterest sensltlve assets and llabllltles. The lnterest rate rlsk ls managed
through the actlvltles of the 8ank's Treasury department. The table below allocates the Group's assets and llabllltles to maturlty
grouplngs based on the tlme remalnlng from the balance sheet date to the closest lnterest re-ñxlng date.
LvL 000's
wlthln
l month
l - 3
months
3 - 6
months
6 - l2
months
l - 5
years
More
than 5
years
Non-
lnterest
bearlng
Total ln
LvL 000's
Lffec-
tlve
lnterest
rate
Assets
Cash and deposlts
wlth central banks 34,346 - - - - - 36,435 70,78l 2.0%
8alances due from
credlt lnstltutlons 232,6l0 5,240 l4,82l 3,756 5,l60 - 5l,283 3l2,870 2.l%
Loans and
advances to
customers l30,824 l65,ll0 272,272 22,078 4l,743 54,87l 4,795 69l,693 5.9%
Plxed lncome
securltles l5,l45 23,8l0 32,322 l4,29l ll6,70l 94,755 l,734 298,758 5.6%
Shares and other
non-flxed lncome
securltles - - - - - - ll,5l2 ll,5l2 -
Derlvatlve
flnanclal
lnstruments - - - - - - l,405 l,405 -
|ntanglble assets - - - - - - 3,497 3,497 -
Plxed assets - - - - - - 23,l69 23,l69 -
Prepayments and
accrued lncome - - - - - - 8,334 8,334 -
Other assets - - - - - - 2,462 2,462 -
7otaI assets 412,925 194,160 319,415 40,125 163,604 149,626 144,626 1,424,481
LiabiIities
8alances due to
credlt lnstltutlons
and central banks ll3,5l4 5,5l5 9,486 3,584 533 - 39,6l8 l72,250 2.l%
Deposlts from
customers 286,942 33,054 44,6l5 67,l04 20,649 l,269 65l,938 l,l05,57l l.8%
Derlvatlve
flnanclal
lnstruments - - - - - - 3,3l0 3,3l0 -
Accrued expense
and deferred
lncome - - - - - - 4,354 4,354 -
Provlslon for llablll-
tles and charges - - - - - - 96l 96l -
Other llabllltles - - - - - - ll,648 ll,648 -
7otaI IiabiIities 400,456 38,569 54,101 70,688 21,182 1,269 711,829 1,298,094
Mlnorlty lnterest - - - - - - l3 l3 -
Shareholders'
equlty - - - - - - l26,374 l26,374 -
7otaI IiabiIities
and sharehoIders'
equity 400,456 38,569 54,101 70,688 21,182 1,269 838,216 1,424,481
Plxed lncome
securltles futures - 8,242 - - (l,59l) (6,65l) - -
|nterest rate
swaps (5,l60) (l2,l90) - - l7,350 - - -
F-86
F-86

1ã. CUkk|NC\ |k0||||
The followlng table provldes an analysls of the Group's assets and llabllltles and shareholders' equlty as well as memorandum
ltems outstandlng as at 3l December 2004 by currency proñle:
LvL 000's
LvL USD LUP G8P PU8 Other Total
Assets
Cash and deposlts wlth central banks 49,l8l l0,267 5,370 828 4l 5,094 70,78l
8alances due from credlt lnstltutlons l9,980 l60,047 73,474 23,068 30,88l 5,420 3l2,870
Loans and advances to customers l25,46l 347,028 l80,73l ll5 339 38,0l9 69l,693
Plxed lncome securltles 50,428 l73,990 59,939 6,358 l,774 6,269 298,758
Shares and other non-flxed lncome
securltles l,0ll 8,ll9 l,272 352 l06 652 ll,5l2
Derlvatlve flnanclal lnstruments l,l88 ll2 47 - - 58 l,405
|ntanglble assets 3,497 - - - - - 3,497
Plxed assets 23,l69 - - - - - 23,l69
Prepayments and accrued lncome 4,00l 2,842 l,l53 3 l7 3l8 8,334
Other assets 962 527 263 6 58 646 2,462
7otaI assets 278,878 702,932 322,249 30,730 33,216 56,476 1,424,481
LiabiIities
8alances due to credlt lnstltutlons
and central banks 23,360 44,656 94,444 l,l23 47 8,620 l72,250
Deposlts from customers l40,l62 658,9l2 243,86l l9,l60 2l,906 2l,570 l,l05,57l
Derlvatlve flnanclal lnstruments 3,273 - l9 - - l8 3,3l0
Accrued lnterest expense and
deferred lncome 2,595 826 507 53 - 373 4,354
Provlslon for llabllltles and charges 96l - - - - - 96l
Other llabllltles 3,36l 3,224 3,206 268 724 865 ll,648
7otaI IiabiIities 173,712 707,618 342,037 20,604 22,677 31,446 1,298,094
Mlnorlty lnterest l3 - - - - - l3
Shareholders' equlty l26,374 - - - - - l26,374
7otaI IiabiIities and sharehoIders'
equity 300,099 707,618 342,037 20,604 22,677 31,446 1,424,481
Ner leng/ (sherr} µesirien Ier
bnlnnce sheer irems (21,221} (4,õ8õ} (19,788} 10,12õ 10,539 25,030 -
Dff-baIance sheet cIaims arising from foreign exchange
Spot exchange recelvable 2,82l 44,l60 29,857 9,466 - 7,088 93,392
Porward forelgn exchange recelvable ll,927 60,648 60,l05 8,8l2 - 40,7l7 l82,209
Swap exchange recelvable 22,748 l75,l68 l37,009 32,l44 - l75,435 542,504
7otaI 37,496 279,976 226,971 50,422 - 223,240 818,105
Dff-baIance sheet IiabiIities arising from foreign exchange
Spot exchange payable 55 35,626 48,02l 5,973 83 3,672 93,430
Porward forelgn exchange payable 2l,535 59,345 42,790 8,5l3 - 50,744 l82,927
Swap exchange payable 7,325 l78,203 l35,748 46,297 5,944 l70,226 543,743
7otaI 28,915 273,174 226,559 60,783 6,027 224,642 820,100
Net lonc/ (shott} µos|t|ons on lote|cn
exchonce 8.581 6.802 412 (10.361} (6.027} (1.402} (1.995}
Ner leng/ (sherr} µesirien (12,õ40} 2,11õ (19,37õ} (235} 4,512 23,õ28 (1,995}
Lxchange rates applled as at 3l
December 2004
(LvL for l forelgn currency unlt) l.00 0.5l6 0.703 0.996 0.0l86 -
The short currency posltlon ln the Luro ls largely on-set by long posltlons ln the Llthuanlan Lltas and Lstonlan Krona. 8oth of
these currencles are pegged to the Luro at a ñxed rate, therefore for the purpose of managlng forelgn currency posltlons they
are treated as posltlons ln the Luro.
F-87
F-87
"//6"-3&1035
The Latvlan banklng leglslatlon requlres that open posltlons ln each forelgn currency may not exceed l0% of the 8ank's equlty
(see Note 33 for the deñnltlon of equlty under the PCMC's regulatlons) and that the total forelgn currency open posltlon may
not exceed 20% of equlty.
The Group and the 8ank was ln compllance wlth the above requlrements as at 3l December 2004.
1I. ||!|ûk!|0N kN0 C|k|M!
|n the ordlnary course of buslness, the 8ank has been lnvolved ln a number of legal proceedlngs to recover collateral
or outstandlng credlt balances, as well as related lnterest and expenses from defaulted credlt customers and lnterbank
counterpartles. The 8ank ls also lnvolved ln a number of legal proceedlngs related to lts customers ln Latvla and abroad.
The Management of the 8ank belleve that any legal proceedlngs pendlng as at 3l December 2004 wlll not result ln materlal
losses for the Group.
1ë. k||k!|0 |kk!||!
Pelated partles are deñned as: shareholders who have slgnlñcant lnnuence over the Group, members of the Councll and 8oard
of Dlrectors, key Management personnel, thelr close relatlves and companles ln whlch they have a controlllng lnterest as
well as assoclated companles of the Group. The followlng tables present the outstandlng balances and terms of the Group's
transactlons wlth related partles.
LvL 000's 31/12/2004 3l/l2/2003
7otaI credit exposure to reIated parties:
Loans and advances l4,589 l4,760
Plnanclal commltments and outstandlng guarantees 2,669 399
l7,258 l5,l59
Total deposlts from related partles 28,760 27,37l
Amount ln
LvL 000's
Average rate
ln 2004
7otaI credit exposure to reIated parties:
Loans and advances l4,589 l.4%
Plnanclal commltments and outstandlng guarantees 2,669 -
l7,258
Total deposlts from related partles 28,760 20.7%
The maìorlty of the above deposlts bearlng lnterest rates of more than l0% are long-term and have been placed wlth the 8ank
at rates slgnlñcantly below the market lnterest rates at the tlme of thelr placement.
|n the ordlnary course of buslness, a/s 1BSFYBQESPÝJOŔÝBOBTLPNQŔOJKB, a related party to the 8ank, undertakes lnsurance of the
collaterals of loans and advances granted by the 8ank to customers.
1º. !U8!|0U|N! |\|N!!
|n Pebruary 2005, the 8ank recelved a syndlcated loan from l8 banks ln the amount of LUP 69.5 mllllon. The loan has been
lssued for l year and lt bears an lnterest rate of LUP|8OP + 0.65%. The Mandated Lead Arranger and underwrlter of the loan
ls Mlzuho Corporate 8ank Ltd, other partlclpants lnclude mostly Aslan banks and several Luropean banks actlve ln Aslan
markets.
F-88
F-88
REGISTERED OFFICE OF THE ISSUER
SC Parex banka
3, Smilsˇu Street
Riga LV-1522, Latvia
FISCAL AGENT
JPMorgan Chase Bank, N.A.
Trinity Tower
9 Thomas More Street
London E1W 1YT
PAYING AGENT
JPMorgan Chase Bank, N.A.
Trinity Tower
9 Thomas More Street
London E1W 1YT
REGISTRAR
J.P. Morgan Bank Luxembourg S.A.
6 route de Tre`ves
L-2633 Senningerberg
(Municipality of Niederanven)
Luxembourg
LEGAL ADVISERS
To the Issuer as to English law: To the Joint-Lead Managers as to English law:
Allen & Overy LLP Clifford Chance
One New Change Limited Liability Partnership
London EC4M 9QQ 10 Upper Bank Street
Canary Wharf
London E14 5JJ
To the Joint-Lead Managers as to Latvian law:
Liepa, Skopina/BORENIUS
Blaumana 5A
Riga LV 1011
Latvia
AUDITORS TO THE ISSUER
SIA Ernst & Young Baltic
Kronvalda bulvaris 3-5
Riga LV 1010, Latvia
Printed by St Ives Financial B824320/20001
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