Annual Report 1995. Financial Statements for 1995 of Eesti Pank

BALANCE SHEET OF EESTI PANK AS OF 31 DECEMBER 1995

PROFIT AND LOSS ACCOUNT OF EESTI PANK FOR THE YEAR ENDED 31 DECEMBER 1995

The financial statements, including the notes, on pages 60 to 72 have been approved by the Management of Eesti Pank on 1 April 1996 and are signed on their behalf by:

         President                                Vice president

         Vahur Kraft                             Heldur Meerits

NOTES TO THE FINANCIAL STATEMENTS OF EESTI PANK

Principles of accounting

The Financial Statements have been prepared in accordance with the Law of the Central Bank of the Republic of Estonia and the Statute of Eesti Pank. Estonian Accounting Law, from which Eesti Pank is exempted, and International Accounting Standards have been adopted only where they are appropriate and applicable to the activities of a central bank.

The Financial Statements have been prepared in accordance with the historical cost basis of accounting, modified to include the revaluation of certain assets as referred to in the notes below.

The Financial Statements and notes have been prepared using accounting policies consistent with those used in recent years. The published balance sheet of Eesti Pank has been structured so that the domestic and foreign claims and liabilities can be separated. In addition, the balance sheet structure demostrates the backing of the kroon by gold and freely convertible currency.

The principal accounting policies adopted for the preparation of the Financial Statements are set out below.

Income and expenses

Realised income and expenses are accounted for in the profit and loss account in the relevant reporting period on an accruals basis, notwithstanding the actual date the money is received or paid. Unrealised gains and losses are credited or charged to reserves.

Foreign currency translation

Transactions denominated in foreign currencies are translated into kroons, the legal tender of the Republic of Estonia, using the official exchange rates of Eesti Pank valid on the day of the transaction. Foreign currency assets and liabilities are translated into Estonian kroons at the Eesti Pank official exchange rate valid on the balance sheet date. IMF balances have been revalued using the SDR exchange rate, calculated on the basis of the SDR basket currencies using Eesti Pank official rates valid on the last day of the year. Non-convertible foreign currency assets and liabilities are translated into kroons using the official DEM exchange rate of the relevant country's central bank valid at the end of 1995 and the Eesti Pank official DEM exchange rate of the same date. Unrealised foreign exchange gains and losses are credited or charged to reserves.

Official exchange rates used at 31 December 1994 and 1995 were as follows:

Gold

Gold reserves are valued at the market value valid at the end of the year using the quoted London Bullion Market price. Revaluation gains and losses are credited or charged to reserves.

Bonds and other securities

Foreign treasury bills and other quoted securities denominated in freely convertible currencies are recorded at their market value valid at the end of the year. Unrealised revaluation gains and losses are credited or charged to reserves. Reverse repurchase agreements and unquoted securities are valued at purchase price.

Investments

Shares and other investments are reflected at their purchase price.

Fixed assets

Fixed assets are recorded at original cost, less depreciation which is provided for on a straight line basis over the estimated useful lives of the assets at the following rates:

Building renovation costs are charged to the profit and loss account as expenses except where the expenditure results in an increase to the external floor area of the building or a change in its use, in which case such costs are added to fixed assets. Provisions are made where it is known or probable that the market value of the asset is less than the value recorded in the accounts.

Loans and provisions

Loans are reassessed periodically and specific provisions are established against those considered to be bad or doubtful due to the borrower's insolvency. Provisions are recorded as expenses of the reporting period. Loans are maintained in the balance sheet until they are repaid or written off. They are written off only after all legal measures to recover them have been taken.

Item 1 - Gold
The Bank's gold reserves of 8,250.171 ounces remained the same as at the end of 1994. The market value at 31 December 1995 was EEK 4432.51008 (USD 386.70 per ounce) compared to EEK 4739.328 (USD 382.50 per ounce) at 31 December 1994.

Item 2 - Convertible foreign currency assets
This comprises current account balances, over-night loans, deposits, short-term investments in gilts and securities managed by a foreign investment bank, reverse repurchase agreements and government bonds denominated in convertible foreign currency, together with accrued interest where applicable.

During 1995 convertible foreign currency reserves have increased primarily due to the foreign currency purchased from Estonian commercial banks, income earned on foreign exchange reserves and the transfer of additional Standby Facilities obtained from the IMF. These have been transferred to a foreign investment bank for management purposes.

The bank's policies for investing the foreign currency reserves of Eesti Pank allow transactions with trustworthy institutions of high international standing only. The general principles of investing the foreign currency reserves are intended to secure the value of the full convertibility of the kroon into other currencies, sufficient liquidity to meet the Bank's obligations and reasonable returns within the given risk restraints. To fulfill these investment policies the bank keeps its foreign reserves in liquid instruments with an average duration of approximately two years and low risk levels.

During 1995 the US dollar continued to weaken against the German mark resulting in further foreign exchange losses. However, these were more than offset by improvements in the value of the Bank's bond holdings, which increased from the second quarter of the year due to lowering of German mark official and short-term interest rates. During 1995 the Bank adopted a policy of reducing the proportion of non-DEM foreign exchange risk within net foreign currency reserves. This will be continued in 1996.

Item 3 (and item 12) - Special Drawing Rights (SDR's)
These items comprise the unused assets and liabilities, denominated in SDR's, arising from the loans granted by the IMF to Estonia.

Within the framework of the 1995 economic programme, the second tranche of the Systemic Transformation Facility (STF) was received from the IMF and mediated by Eesti Pank who acted as a Government agent.The last tranches of the Standby Agreement (SBA) loans were received and invested more efficiently in securities denominated in the SDR basket currencies than holdings in SDR's with the IMF.

The following table in Estonian kroons shows the above described changes:

The differences between the balance sheet and the above table are caused by the inclusion in the balance sheet totals of accrued but not received interest that at the end of 1994 and 1995 amounted to EEK 159,900.60 (SDR 8,839) and EEK 35,976.97 (SDR 2,112), respectively.

Item 4 (and item 12) - Participation in IMF
Participation in the IMF is recorded in the assets' side of the balance sheet and equals the country's quota in the IMF, which is recorded in the liabilities' side of the balance sheet ("IMF kroon accounts"). Estonia's quota in the IMF was SDR 46,500,000 (EEK 792,106,575) at the end of 1995:

Item 5 (and item 18) - Non-convertible foreign currency assets and deposits
This item shows the accounts of Eesti Pank held with the central banks of CIS countries, Latvia and Lithuania and used for settlement of payment transactions with those countries on behalf of Estonian commercial banks and the Government of Estonia. The compensating balances with those organisations are shown as demand deposits of Estonian banks in item 18 "Non-convertible foreign currency deposits".

Item 6 - Loans
By the end of 1995 total loans had decreased compared to the end of 1994 by more than 240 million kroons. The decrease arose due to increases of provisions against bad and doubtful loans, repayment of loans and replacement of certain loans with guarantee agreements.

Set out below is a more detailed analysis of the movements on loans during the year.

Additional explanations for certain of the changes in loans are given below.

Eesti Sotsiaalpank
At the end of 1994 Eesti Sotsiaalpank owed Eesti Pank EEK 230.6 million, including subordinated loans of EEK 38.5 million and liquidity loans of EEK 192.1 million, against which provisions of EEK 74 million were established in the 1994 accounts. The loan balance increased by a further EEK 6.7 million in early 1995 as a result of an unsettled USD purchase contract.

In March 1995 the subordinated loans were transferred to Põhja-Eesti Pank and in June 1995 Eesti Pank acquired from Eesti Sotsiaalpank shares in Arrow AS, a property holding company, in settlement of EEK 3 million of other loans

On 10 May 1995 Eesti Sotsiaalpank's licence was revoked and, subsequently, a firm of loan recovery specialists was appointed to seek recovery of the remaining problem loans portfolio. However, this is expected to be a long and expensive process. Accordingly, while it is still believed that some loan recoveries, as well as additional income from disposal of property, will be achieved, Eesti Pank has decided to provide for the reminder of the Eesti Sotsiaalpank liquidity loans of EEK 124.5 million, including accrued interest, in the 1995 accounts.

Painküla Starch Factory
Further provisions have been established for claims under guarantees issued by Eesti Pank in 1990 and 1991 in respect of long-term loans and interest thereon from Donau Bank AG (Vienna, Austria) and Eesti Maapank. These loans became a liability of Eesti Pank on privatisation of the factory in 1993 because, according to the privatisation terms, these loans were not repayable by the new company formed on privatisation. Total costs incurred by Eesti Pank under these guarantees now amount to EEK 69 million, with further commitments remaining of EEK 16.1 million.

Intermediary Loans
The reduction in the year is due mainly to the substitution of the loan agreement signed between Eesti Pank and the European Investment Bank by a guarantee agreement under a contract dated 29 November 1995 whereby Eesti Investeerimispank (Estonian Investment Bank) became the borrower. Eesti Pank's ongoing guarantee exposure is disclosed under item 22. The remaining intermediary loans are those where the Bank acts as agent for credits received from Vientiluotto OY.

Loans to other operating banks reflect loans for crediting farmers that were issued to commercial banks by the order of Eesti Vabariigi Ülemnõukogu (the Supreme Council of the Republic of Estonia) in 1991 and 1992. These loans fall due at the end of 1996 and first quarter of 1997.

Home-purchasing loans and consumer loans to the employees of Eesti Pank are provided for a maximum of 25 and 2 years, respectively.

Item 7- Bonds
Bonds held in Estonian institutions are analysed as follows:

*  50 interest free 10-year debentures of Eesti Maapank, aggregate nominal value EEK 5 million, maturing on 1 September 2002. The debentures were purchased for EEK 2 million and are reflected in the balance sheet at this amount.
** In August 1994 15 1.25% marketable two-year bonds of Tööstuse ja Ehituse Kommertspank were bought at their total nominal value of EEK 15 million. The amount above also includes accrued but not yet received interest.

Item 8 - Shares
Shares held by Eesti Pank comprise the following:

N/A - not available

In 1995 Eesti Pank continued its general policy of reducing its shares in Estonian commercial banks.

Eesti Investeerimispank
In accordance with the agreement signed in October 1994, Eesti Investeerimispank issued new shares to investment institutions in Finland, Germany and Sweden in 1995. This reduced the share of Eesti Pank in Eesti Investeerimispank to one third.

Eesti Hoiupank
As a result of a closed issue of shares to the management and employees of Eesti Hoiupank and a further public issue in October 1995, in which Eesti Pank did not participate, the Bank's investment was reduced to 24.1%.

Bank for International Settlements
BIS shares (25% paid in) with a total book value of EEK 7,837.50 are included at their historical cost established in 1930 (when Eesti Pank joined the BIS). The historical cost reflects the conversion from Estonian kroons to rubles in 1940 and from rubles to Estonian kroons in 1992. It is possible that further calls for share capital will be made by BIS against Eesti Pank in the future but no such calls have yet been received.

Arrow
In June 1995 Eesti Pank purchased shares in the joint stock company Arrow AS from Eesti Sotsiaalpank, with the consideration settled by the write off of EEK 3 million of Eesti Sotsiaalpank loans.

Põhja-Eesti Pank
In March 1995 Eesti Pank and Põhja-Eesti Pank signed an agreement regarding the subscription and purchase of PEP shares. Accordingly the 38.5 million kroons of subordinated loans due from PEP (item 6) were exchanged for 3850 shares of EEK 10,000 each, to be sold on later privatisation of PEP.

In August 1995 part of the PEP shares owned by Eesti Pank were annulled when PEP's share capital was decreased in order to cover the PEP losses for 1994.

In order to further reduce Eesti Pank's share in Estonian credit institutions, Eesti Pank decided to sell part of its PEP shares to credit institutions of the Republic of Estonia through a limited tender with prior negotiations. The limited tender was won by Eesti Ühispank which in September acquired one third of Eesti Pank's shares in PEP. In addition, Eesti Ühispank has first right to acquire Eesti Pank's remaining shares in PEP, subject to agreement on an appropriate price.

Tallinn Stock Exchange
In May 1995 Eesti Pank as a founder purchased one share in the Tallinn Stock Exchange.

Item 9 - Other assets
This item includes the difference between the nominal value and selling price of the Eesti Pank Certificates of Deposit sold to banks, prepayments for services and goods to be provided in 1996 and the cost of Eesti Pank sundry assets.

Item 10 - Fixed assets
Details of movements in fixed assets during 1995 are as follows:

The increase in the net book value of fixed assets in 1995 compared to 1994 arises primarily due to the purchase of computer equipment, furniture and fittings as well as the renovation of buildings.

Item 11 - Foreign debts
Foreign debts, which also include accrued but not yet received interest at the end of 1994 and 1995, comprise the following:

The related assets connected to the above items are included in "Loans to financial institutions" and "Other loans" (item 6). The maturity dates of loans received from the Vientiluotto OY fall mainly between 1996 and 1998.

There were no short-term loans secured by foreign securities as of the end of 1995.

Item 12 - IMF kroon accounts
This item shows the Estonian kroon deposits of the IMF held with Eesti Pank, which include loans granted by the IMF to Eesti Pank and the quota of the Republic of Estonia in the IMF (see also items 3, 4 and 17).

At the beginning of 1995, the last part of the account agreed upon with the IMF under the Standby Agreement (SBA) was received. At the end of 1995 the first repayment under the SBA took place. Repayments under the SBA are by annual instalments up to the year 2000.

The following table (in kroons) shows the movements of the loans obtained from the IMF and participation in the IMF.

The differences between the balance sheet and the table are caused by inclusion in the balance sheet totals of accrued but not yet received interest that at the end of 1994 and 1995 amounted to EEK 7,318,179.74 (SDR 404,535) and EEK 8,124,986.35 (SDR 476,971), respectively.

Item 13 - Accounts of non-residents
This item includes non-interest bearing accounts held with Eesti Pank by the central banks of the CIS countries, Latvia and Lithuania, which are used for settling transactions between Estonia and those countries through Eesti Pank.

Item 14 - Notes and coins in circulation
This item shows banknotes and coins issued for circulation by Eesti Pank. An analysis of the notes and coins in circulation is shown on pages - of the Annual Report. As of 31 December 1995 there were notes and coins in circulation amounting to in excess of EEK 4.3 billion which is approximately 23% higher than the year before. Banknotes formed 98.9% of this balance.

Item 15 - Accounts of banks and other current liabilities
This includes the correspondent accounts of Estonian commercial banks with Eesti Pank. No interest is paid on these accounts, except that amounts were paid to Eesti Hoiupank up to August 1995, based upon their excess reserves with Eesti Pank. In order to unify the requirements for banks, the reserve requirement calculations for Eesti Hoiupank were changed on a graduated basis from September 1995 so that they were consistent with other commercial banks by December 1995. Accordingly, interest on the Eesti Hoiupank account ceased to be paid from December 1995.

Item 16 - Securities
The short-term Certificates of Deposit shown here are 28 day discountable papers issued to Estonian commercial banks with EEK 100,000 nominal value.

Item 17 - Convertible foreign currency deposits
The convertible foreign currency account shows demand deposits of the Republic of Estonia held with Eesti Pank. It includes the undistributed element of the Systemic Transformation Facility in SDR and German marks provided to the Republic of Estonia by the IMF, together with accrued interest payable. Eesti Pank acts as agent in the name of the borrower - the Republic of Estonia.

The above table (in kroons) shows only the movement of the SDR denominated part of the loans. Before the loans were transferred to commercial banks, the SDR's were converted into German marks, EEK 159,227.36 equivalent and EEK 4,252.96 equivalent of which remained undistributed at the end of 1994 and 1995, respectively, for technical reasons. In addition, the balance sheet included accrued interest of EEK 161,854.36 and EEK nil as at the end of 1994 and 1995, respectively.

Item 18 - Non-convertible foreign currency deposits
This item includes non-convertible currency demand deposits of the Government of the Republic of Estonia and of Estonian commercial banks with Eesti Pank. The deposits are related to transactions with the CIS countries, Latvia and Lithuania carried out through Eesti Pank.

Item 19 - Other liabilities
This item includes sundry other accounts payable in 1996 for 1995 costs. A long-term credit of EEK 8,019,703.10, including interest, granted to the Painküla Starch Factory by Eesti Maapank and guaranteed by Eesti Pank is also included here.

Item 20 - Capital and reserves
Capital and reserves can be analysed as follows:

In accordance with the Law of the Central Bank of the Republic of Estonia at least 25% of annual profit is allocated for increasing each of the statutory and reserve capital, up to at least EEK 100 million each. After these allocations, part of the profit can be allocated for forming and supplementing special reserves based on a decision of the Board of Eesti Pank. The residue of the profit is transferred to the State budget. In 1992 Eesti Pank covered from the special reserve the losses arising from revaluation of ruble assets and liabilities at the time of monetary reform, amounting in aggregate to more than half a billion kroons. In accordance with the 1993 decision of the Board of Eesti Pank, the Eesti Pank reserves have to be restored from the profit of the next ten years. Thus, 50% of the 1993 profit was allocated to fixed and reserve capital in equal shares and the residue of the profit was transferred to the special reserve after payment of EEK 30 million to the State budget.

According to the Decision of Riigikogu (the Parliament) of 21 December 1995, reserve capital of Eesti Pank was increased by transfer from special reserves of EEK 229,429,066.82 which enabled the 1994 loss of EEK 170,152,054.52 to be covered, while leaving reserve capital at the same level as statutory capital.

The revaluation reserve includes the unrealised difference between the cost and market price of foreign securities. At the end of 1994 the market price of the foreign securities was lower than their cost price, whereas at the end of 1995 the situation was reversed. The main reason was the rise from the second quarter of 1995 in market prices of bonds denominated in German marks.

The exchange rate differences reflect the results of translating the claims and liabilities denominated in foreign currencies into kroons at the balance sheet date. The continued fall in value of certain foreign currencies, particularly the US dollar, in 1995 has caused this item to decrease further.

The fixed assets reserve reflects the 1993 revaluation of fixed assets.The transfer from this reserve to the special reserve reflects the realisation of the revalued amount in line with depreciation on the related assets.

Item 21- Profit/(loss) for the year

Comments on the profit and loss account

The profit and loss account has been presented in order to show separately income and expenses on foreign and domestic assets and liabilities, consistent with the balance sheet. This presentation is consistent with that used in 1994.

Foreign net interest income and similar items

This includes principally interest income, realised exchange gains, income from the sale of securities and dividends less interest expense and losses on the sale of securities. The increase in net income by more than EEK 100 million was achieved through the continued policy of investment in higher yielding assets and the positive developments on world bond markets in 1995. Another reason for the increase in net income was the growth of foreign currency reserves achieved through the purchase of foreign currencies from the Estonian commercial banks.

Domestic net interest income and similar items

This includes principally interest earned on domestic loans, together with gains and losses on buying and selling kroons, interest payable on CD's issued by the Bank and interest paid to Eesti Hoiupank on the excess reserves it was required to hold with Eesti Pank until the end of 1995. Interest earned by the Bank has fallen during 1995 as a result of lower net loan balances in the year. Interest paid to Eesti Hoiupank has fallen from EEK 9,440,906.90 in 1994 to EEK 3,004,693.50 in 1995 as the reserve requirements have changed.

Profit/(loss) from sales of gold

There were no sales of gold in 1994 or 1995. In future, if profits or losses arise on the sale of gold then these will be included in "Foreign net interest income and similar items".

Other operating income

This includes income connected with adjustments in respect of prior year items and with various charges for sundry non banking related services. In 1995, the present entry includes income from the sale of commemorative coins and cheque books and adjustments made in respect of expenses connected with the production of coinsets.

Other operating expenses

Other operating expenses have been analysed by principal category, consistent with the way in which the Bank's management budget for and monitor costs. Staff related expenses comprise not only salaries and salary related expenses, including health insurance and social security taxes, but also training, business travel, sports and social expenses. The increase in staff related expenses is due mainly to salary rises intended to keep pace with inflation. The costs of making money have decreased in 1995 as the Bank has been able to meet more of the demand for new notes and coins from existing stocks. Depreciation costs have increased in line with the acquisition of computers, fittings and buildings. Renovation costs have been reduced in 1995 by one third and are budgeted to fall further in 1996.

Provisions for bad and doubtful loans and other claims

In December 1995 additional loan loss provisions for bad and non-performing loans including accrued interest were made as analysed in item 6:

Exceptional items

These include items of income and expense arising on transactions of an unusual or infrequent natures including items. In 1994 there were mostly connected with monetary reform in 1992. In 1995 this includes mainly the value of annulled PEP shares owned by Eesti Pank (see item 8).

Distribution of 1995 net profit

This will be allocated, in accordance with the Law of the Central Bank of the Republic of Estonia, as follows:

Item 22 - Off-balance sheet items

Contingencies and commitments

As of 31 December 1995 Eesti Pank had outstanding a number of EEK/DEM forward contracts amounting to EEK 1,465,086,819.47 maturing on various dates up to 2002. Under these contracts, which are with Estonian commercial banks, Eesti Pank is committed to sell DEM at future specified dates for between 8.0010 and 8.0020. Such contracts, which were offered only until March 1995, reflect the Bank's commitment to maintaining reserves primarily in DEM and to the pegging of the EEK to the DEM.

On 27 November 1995 Eesti Pank entered into an agreement with the European Investment Bank and Eesti Investeerimispank whereby it guaranteed loans amounting in total to ECU 10 million, which mature on dates between 1999 and 2006.

Under an agreement dated December 1995 with Põhja-Eesti Pank, the Goverment of the Republic of Estonia and Eesti Ühispank, Eesti Pank has agreed to provide special guarantees to PEP up to a maximum of EEK 220 million, conditional on the other parties to the agreement meeting their commitments under the agreement. Eesti Pank does not expect that these guarantees will need to be called.

Off-balance sheet assets (property rights)

By a Decision of the Supreme Council of the Republic of Estonia on 23 January 1992 Eesti Pank was allocated forestry rights from the State forestry reserves with their value estimated in 1992 of USD 150 million. These forestry rights are available to meet obligations, if any, at the discretion of Eesti Pank. These rights have not been included in the Bank's balance sheet assets.