Page 82 - Annual Report 2023

13 BANKA KOMBËTARE TREGTARE
Notes to the Consolidated Financial Statements for the year ended 31 December 2023
(amounts in USD, unless otherwise stated)

government bonds that were previously classified as held-for-trading under IAS 39 fall into this category.

Financial assets at fair value through other comprehensive income (T)
The Group accounts for financial assets at FVOCI if the assets meet the following conditions:
• they are held under a business model whose objective it is “hold to collect” the associated cash flows and sell and
• the contractual terms of the financial assets give rise to cash flows that are solely payments of principal and interest on the principal
amount outstanding.
Any gains or losses recognised in other comprehensive income (OCI) will be recycled upon derecognition of the asset. The Group’s
government bonds and treasury bills, corporate bonds, promissory notes, assets backed securities and equity portfolio that were
previously classified as available for sale under IAS 39 fall into this category.

(v) Reclassifications of financial assets
The Bank has made a reclassification of AFS (FVOCI) securities to HTM (Amortized Cost) securities between 24th February – 3rd March
2022. The Board of Directors and Senior Management have decided to change the business model of treasury investments recognized
and measured under IFRS9. The change of business model is very rare for the Bank. Based on the new business model, the entity
objective is to keep the majority of its treasury investments at Amortized Cost by holding to collect their contractual cash flows. The
Management intention is solely to benefit from the spread between the yield of financial assets and cost of liabilities. As such, the new
business model is not for an individual asset but for a higher level of aggregation which makes a significant part of Bank’s financial assets.

Considering the above, the Bank has reclassified a significantly high portion of its ALL (Albanian Lek) and FX securities from AFS
portfolio (‘Hold to collect and sell’ measured at Fair Value through Other Comprehensive Income) to HTM portfolio (‘Hold to collect’
measured at Amortized cost), with the following exceptions:

For FX portfolio:
- Corporate bonds with composite credit rating lower than BB- and duration longer than 4 years;
- Corporate bonds with composite credit rating equal to or higher BB-, but with duration longer than 7.5 years;
- Financial Institutions and Sovereign bonds with composite credit rating less than BB- and duration longer than 4-years, and
- Financial Institutions and Sovereign bonds with composite credit rating equal or higher than BB-, but with duration longer than 7.5
years.

For ALL portfolio:
- T-bills, because they are discounted papers and they have maturity shorter than a year;
- Up to 20% of 3-years and 5-years benchmark ALL securities. This is to comply with requirements of Market Making mechanism
since BKT is Market Maker on these benchmark bonds.

The Bank’s objective is that securities with lower credit ratings and long-term maturities (with higher risk), as well as to have a real-time
Marked-to-Market assessment, should not be kept in Amortized Cost. Meanwhile, Turkish and Albanian government bonds can be
measured at Amortized Cost, since they represent the shareholder’s country of origin (Turkey) and the country where BKT operates
(Albania). The Bank has considered all the available information at the moment of decision for changing its business model.

Accordingly, securities portfolio measured at FVOCI was more than halved in February-March 2022 by contracting the nominal value
at US$947mio, out of which US$615mio from Lek portfolio and US$332mio from FX portfolio. Following the change of business
model and the consequent reclassification of its financial assets, the nominal amount portion of investment securities measured at
amortized cost to total securities portfolio (excluding Treasury bills) on a consolidated basis reached to 62% as at 31 December 2022
(31 December 2021: 9%), while the portion of investment securities measured at fair value contracted to 38% as at 31 December
2022 (31 December 2021: 91%).