Strategic commitment of the bank

Transcription

1 Annual Report 2014

2 FOR PROCREDIT BANK

3 Strategic commitment of the bank ProCredit is the only specialist, development-oriented bank for small and medium enterprises in Macedonia. From a development point of view, we are convinced that progressive and productive businesses are vital to economic development, as they posess the innovative capabilities that are necessary to create new jobs and are key to the economic and political stability of our country. Therefore, unlike all the universal banks, we offer specialised financial services which are tailored to the special development needs of such businesses. The key difference in our commitment to development is that we want to make more than just a contribution to GDP growth, improved efficiency and greater productivity we also believe that development includes the development of the individual and of a democratic society with social justice and social responsibility. As a bank, we aim to cultivate all these social and economic aspects and to implement them in our everyday activities. This means that our clients are always given clear, easy to understand information when they approach us for advice on financial services. Our lending procedures demand an individual approach, with a good understanding of the clients needs, their business and the sector they operate in, all of which enables us to structure our financial services appropriately and responsibly. We strive to contribute to environmental protection in every aspect of our work. This starts with the personal awareness of our staff, the standard of our premises and the resource-saving processes we utilise; it continues with a careful analysis of our client s activities based on the risks they pose to the environment; and ultimately includes special green financial services for businesses that invest in projects to improve their energy efficiency or to reduce the impact of their operations on the environment. Development also implies continuously adjusting to the specific needs of businesses and introducing modern, innovative services. We are the first bank available to clients 24/7, both through the 24/7 Zones at our branches as well as via our wide range of electronic services which make it easy to work with the bank. These are just some of the ways we support our clients by adjusting to their specific working dynamics.

4 SHAREHOLDERS ProCredit Bank Macedonia s owner is ProCredit Holding, the parent company of the international ProCredit group based in Frankfurt, Germany Shareholders Seed capital in EUR Number of shares Percentage of capital ProCredit Holding ,00% *Data as of 31 December ProCredit Holding is a public-private partnership; its shareholders include KfW (the German development bank), IFC (the private sector arm of the World Bank), FMO (the Dutch development bank) and BIO (the Belgian Investment Company for Developing Countries), as well as private companies such as IPC and IPC Invest, the Dutch DOEN Foundation, the US pension fund TIAA-CREF, etc. These reputable and eminent international institutions share the same development- oriented vision and see themselves as long-term partners of ProCredit Bank Macedonia. That is a guarantee for the long-term presence of the institution in the country and the wide range of financial services which support the development of small and medium enterprises in Macedonia.

5 BBB- Credit rating ProCredit Bank is the only bank in Macedonia with a BBB- credit rating from the international rating agency Fitch Ratings, London. This is the highest rating which can be awarded to a bank in Macedonia, as is equal to the country s rating ceiling. Fitch has regularly assessed the bank s credit rating since 2005, based on a range of parameters. ProCredit Bank Macedonia s credit rating was raised from BB+ to BBB- in July last year. The majority ownership, common branding, close integration and a track record of timely capital and liquidity support to group banks from parent ProCredit Holding based in Germany had a big impact on the enhancement of the bank s rating. Apart from the parent company s support, the individual success and achievements of the bank also contributed positively to the BBB- rating from Fitch. The bank continuously maintains a high loan portfolio quality, significantly above that of the overall Macedonian banking sector; the high level of liquidity also contributes to its stability. Moreover, Fitch Ratings emphasised the bank s strong management and corporate culture as significant strengths.

6 Procredit group - basic financial key figures ProCredit Holding AG & KGaA is the group s parent company, owning a controlling shareholding in all ProCredit banks. ProCredit Holding has been licensed by the German Financial Supervisory Authority (BaFin) since January Therefore, all ProCredit institutions submit reports and are controlled in accordance with German banking regulations, which govern all key areas of the group s banking operations. Total assets Gross loan portfolio Net Profit Number of clients EUR ЕUR

7 Key figures EUR 000 MKD Change MKD Balance sheet Total assets Gross Loan Portfolio Busines Loan Portfolio EUR 10, EUR 10,000 < ЕУР 30, EUR 30,000 < ЕУР 150, EUR 150, Agricultural Loan Portfolio Housing Improvement Loan Portfolio Other Allowance for Impairment on Loans Net Loan Portfolio Liabilities to Customers Liabilities to Banks and Financial Institution (excluding PCH) Shareholders Equity ,8% 14,7% 17,7% -29,0% 10,5% 17,4% 51,4% -0,6% 9,6% -19,5% 18,1% 14,6% 14,6% -2,3% 13,6% Income statement Operating Income Operating Expenses Operating Profit before tax Net Profit ,1% -10,2% 47,5% 33,2% Key ratios Cost/Income ratio ROE Capital Ratio Nonperforming Loans 62,1% 13,6% 13,0% 2,8% 70,0% 11,6% 14,2% 2,6% Operational statistics Number of Clients out of which Business Clients Loans Outstanding Number of Deposit Accounts Number of Staff Number of Branches and Service Centers/Points ,8% -24,1% -7,3% -4,2% -18,9% -20,0% Exchange Rate MKD/EUR 61, ,5113

8 Letter from the management board Over the past year we ve continued the tradition of building successful partnerships and long-term relationships with our clients. The year was marked with excellent results along with a number of key innovations that have confirmed that we are a modern, progressive bank. We are a leader in the field of financial support for small and medium enterprises, the only bank with expertise in supporting agricultural businesses and a bank with regional connections, providing local development support for our clients. The total loan portfolio grew by 15% during the year, which is above the banking sector average of 10%. Moreover, this growth was achieved with a particularly low level of non-performing loans, which at only 1.9% was less than a quarter of the banking sector average of 11.3%. This is a result of the professional credit assessments we perform and our long-term business relationships with clients as well as proactive, timely loan restructuring if a client encounters difficulties with repayments. Further confirmation of clients trust in the bank s safety and stability was the 15% growth in our deposit base was a year of significant innovations in our banking operations. We made a wide range of modern technology available to our clients. ProCredit Bank was the first bank in the market to introduce 24/7 Zones, enabling clients to make cash and non-cash operations at any time. We launched our mobile banking application, expanded the range of services available through electronic banking and introduced electronic signatures for documents. In this way, the bank has made great strides in the provision of modern banking services, offering our clients maximum availability and efficiency. In order to offer a faster and simpler service, at the beginning of the last year we introduced the credit limit, which enables business clients to access a preapproved amount of funds which is calculated on their financial capacity. This allows clients to withdraw funds to cover both short-term financing needs as well longer term investments to match the current dynamics of their business. During the past year, we also provided strong support to enterprises which were investing in new machinery, equipment, vehicle fleets or business premises, or which were entering new markets. Many of these investments were aimed at improving energy efficiency and the use of renewable energy sources investments which we believe are an inseparable part of a successful business and which we actively support. One of the main focuses of our work was supporting the agricultural sector, which we believe has great potential in the domestic economy. We demonstrated that we are not only the market leader in providing financial support to all areas of Macedonian agriculture from small individual farmers to large-scale agricultural producers and traders but that we are also the only bank directly supporting initiative in this area, such as the use of modern technology and implementing innovative development plans. To this end, we selected and rewarded the most innovative agricultural investments by helping the most proactive agricultural businesses from around the country to attend a major agricultural fair in Berlin, where the Macedonian visitors had a fantastic opportunity to find out about new trends and technologies in agriculture, to exchange experiences and to make new international business contacts.

9 As a strong successful regional bank, we add a new dimension to what it means to be a bank that supports its clients business development. The strong network of ProCredit banks in the region is particularly useful for businesses aiming to expand into new markets in neighbouring countries. By organising a series of business meetings between clients of the ProCredit banks in Macedonia, Albania, Kosovo and Serbia, we helped connect over 150 Macedonian businesses with a regional network of recommended ProCredit clients. Such experiences have confirmed to us that this is a great way for enterprises to meet new potential business partners and opens up opportunities to enter new markets for their products. For us, this is what providing support really means. Throughout the year we promoted and encouraged the creation of a regular savings culture. Our deposit base grew by 15%, which demonstrates the trust clients have in the safety and stability of the bank. The increase was mainly due to growth in savings accounts held by private citizens who have choose to entrust their money to us, as they feel we offer the best opportunity to manage their savings in a flexible way. Thanks to the proactive support of our German shareholders and our responsible and individual approach to existing and new clients, the bank succeeded in posting a profit of MKD 209 million which was 19.5% higher than the previous year. We also ended 2014 with improved financial indicators: our return on equity was 9.1% and the capital adequacy ratio was 15.6%. Our service quality relies on the dedication and professionalism of our staff. Therefore, selecting employees and investing in their development has become a strategic element in our operations. We recruit staff with high potential through our six-month Young Bankers Programme. The successful candidates then spend an additional 18 months gaining practical experience working with clients. The bank also allocates significant funds for the training of staff at the regional ProCredit Academy in Veles and at the group Academy in Fürth, Germany. By investing in our staff, we ensure that we have the most valuable resources for the bank s long-term future development. The Management Board would like to express its gratitude to the staff for their professionalism and their commitment to the bank s mission and for helping us to achieve such excellent results. Jovanka Joleska Popovska General Manager Emilija Spirovska Member of Management Board Valentina Nikovska Member of Management Board

10 Perspective In the coming year we will continue to offer financial services to supprt companies with a clear vision and good investment plans for high-quality, sustainable and longterm development projects. We expect that the level of support to Macedonian enterprises in 2015 will be over EUR 25 million. Thanks to the co-operation and support of ProCredit Bank in Germany, businesses with good prospects can expect better conditions and greater security. The main focus of our financial support will be manufacturing companies; export-oriented businesses; companies investing in energy-efficient solutions; and agricultural businesses investing in new technologies, hybrid varieties and organic production. In 2015 we will offer even stronger support to entrepreneurs who want to grow internationally. We will facilitate this through our innovative ways of working, including our ongoing series of business meetings to help clients contact potential partners in Macedonia and around the region as well as joint participation with our clients at international fairs, forums, etc. Moreover, businesses with operations in more than one country in which ProCredit is also present can take advantage of an internationally calculated limit. This means having complete support in the area of financing and payments with a single partner covering all the needs of business clients with international offices. We will also continue to encourage a savings culture, with a focus on regular flexible saving and instant access to the funds in the account. We will continue to help private clients save to buy their own apartment or house, or to pay for home improvements such as renovation and improving their existing home s energy efficiency. We will remain true to our social mission to protect our clients from over-indebtedness and will provide support tailored to match their financial capacities will be a year in which we will make an even greater impact by introducing more innovations in the banking industry. 24/7 zones will be located at all our branches with modern, completely automated machines available for clients to use at any time. In these zones, the clients will be able to perform most banking operations independently, including Cash In and Cash Out transactions, printing account statements or checking the status of electronic transfers between accounts. Clients will no longer be limited by the branch s opening times and there will be no more waiting to be served at the cash desk; moreover, these automated services will be cheaper than personal service. Almost anything can be replaced by technology, but not professional advice or fully understanding the client s needs.for this reason, alongside the technical innovations and development, at ProCredit, the cornerstone of our organisation is our staff. The best employees in Macedonia are chosen and trained to provide he best level of service. We will continue to invest in comprehensive, high-quality training, not only at local level but also at the ProCredit academies. In this way, we aim to ensure

11 high-quality service that bolsters our responsible approach to banking and helps us to build up mutual trust with our clients. We believe that in the coming year even more businesses and professionals will chose ProCredit bank as their primary bank due to the wide range of benefits we can offer: simplicity, speed, expertise and quality of service.

12 Management Board Management From left to right Emilija Spirovska Member of Management Board Jovanka Joleska Popovska General Manager Valentina Nikovska Member of Management Board

13 ProCredit Bank AD Skopje Financial Statements prepared in accordance with International Financial Reporting Standards for the year ended 31 December

14 Content Independent auditor s report Pages Income statement 1 Statement of profit or loss and other comprehensive income 2 Statement of financial position (balance sheet) 3 Statement of changes in equity 4-5 Cash flow statement 6 Notes to the financial statements

15 Independent Auditor s Report

16 KPMG Macedonia 000 Skopje Soravia Center Skopje 7th floor Filip Vtori Makedonski No.3 Skopje 1000 Republic of Macedonia Telephone (2) Telefax +389 (2) kpmg@kpmg.com.mk Website Independent Auditors' report to the shareholders of ProCredit Bank AD Skopje We have audited the accompanying financial statements of ProCredit Bank AD Skopje ("the Bank"), which comprise the statement of financial position as at 31 December 2014, the income statement, statement of profit and loss and other comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors ' Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting principles used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. KPMG Macedonia 000 Skop1e IS a Macedonian hm1ted hab1hty COfTl>Ony and a mert'oer form of the KPMG netwo<k of mdependent merrbet firms afflltated WTth KPMG lnternatloflal Cooperattve rkpmg lnternati0nal"), a SWlSS entity Registered 1n the Trade Registry of the Repobhc of Macedonia wnh EMBS: Tax No MK

17 Independent Auditors ' repor/ Opinion In our opinion, the financial statements give a true and fair view of the financial position of the Bank as at 3 J December 2014 and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Other matter The financial statements of the Bank for the year ended 31 December 2013 were audited by another auditor who expressed an unmodified opinion on those statements on 30 April KPMG Macedonia DOO 28 April 20 J 5 Skopje

18 Financial Statements

19 Income statement in '000 MKD Note Interest and similar income 1,298,953 1,311,353 Interest and similar expenses (443,933) (454,893) Net interest income (22, 25) 855, ,460 mpairment losses on loans and advances (10, 26) (170,186) (143,022) Net interest income after allowances 684, ,438 Fee and commission income 253, ,373 Fee and commission expenses (58,384) (55,903) Net fee and commission income (23, 27) 195, ,470 Result from foreign exchange transactions (28) 43,137 43,849 Net result from available-for-sale financial assets (29) 13,395 17,435 Net other operating income/(expense) (30) (88,000) (123,054) Operating income (31,468) (61,770) Personnel expenses (31) (249,147) (262,918) Other administrative expenses (31) (364,412) (379,931) Other tax expenses (15, 32) - (2,150) Operating expenses (613,559) (644,999) Profit before tax 234, ,139 Income tax expense (15, 32) (25,672) - Profit for the year 209, ,139 1

20 Statement of profit or loss and other comprehensive income in '000 MKD Note Profit for the year 209, ,139 Items that will not be reclassified to profit or loss: Remeasurements of post employment benefits - - Change in deferred tax from remeasurements of post employment benefits - - Revaluation of premises and equipment - - Items that may be reclassified subsequently to profit or loss: Change in revaluation reserve from available-for-sale financial assets (15,147) 15,649 Change in deferred tax on revaluation reserve from available for sale assets - - Other comprehensive income for the year, net of tax (15,147) 15,649 Total comprehensive income for the year 194, ,788 2

21 Statement of financial position in '000 MKD Assets Note Cash and cash equivalents (8, 33) 2,767,102 2,193,194 Loans and advances to banks (9, 34) 846,849 1,045,769 Available-for-sale financial assets (6, 35) 64, ,605 Loans and advances to customers (6, 36) 14,471,592 12,598,819 Allowance for losses on loans and advances to customers (10, 37) (549,926) (430,958) Property, plant and equipment (12, 13, 39) 510, ,408 Intangible assets (11, 38) 3,596 23,930 Current tax assets (15, 41) - - Deferred tax assets (15, 41) 1,878 - Other financial assets (42) 18,528 41,636 Other non-financial assets (42) 91,562 99,456 Assets of discontinued operations held for sale Total assets 18,225,888 16,471,859 Liabilities Liabilities to banks (16, 43) 9,139 9,646 Liabilities to customers (16, 44) 12,306,861 10,689,060 Borrowings (45) 3,276,341 3,355,409 Debt securities - - Other financial liabilities (46) 16,912 17,625 Other non-financial liabilities (46) 19,678 5,923 Provisions (17, 18, 47) 16,756 17,083 Current tax liabilities (15, 41) 25, Deferred tax liabilities (15, 41) - - Subordinated debt (19, 48) 599, ,013 Hybrid capital (49) 193, ,897 Total liabilities 16,464,084 14,887,867 Subscribed capital (50) 798, ,258 Legal reserve 84,505 84,505 Retained earnings 875, ,011 Revaluation reserve from available-for-sale financial instruments (35) 3,071 18,218 Total equity 1,761,804 1,583,992 Total equity and liabilities 18,225,888 16,471,859 3

22 Statement of Changes in Equity in '000 MKD Attributable to equity holders of the bank Total Legal Revaluati Share Share Capital reserv Retained on capital premium reserve e earnings reserve Balance at January 1, , , ,011 18,218 1,583,992 Total comprehensive income Profit for the year , ,272 Other comprehensive income, net of tax Revaluation of available-for-sale securities (15,147) (15,147) Total other comprehensive income for the year (15,147) (15,147) Total comprehensive income ,272 (15,147) 194,125 Transactions with owners of the Bank Contributions and distributions Distributed dividends from profit (16,313) - (16,313) Transfer to legal reserve Capital increase parent company, voting shares Total contributions and distributions (16,313) - (16,313) Balance at December 31, , , ,970 3,071 1,761,804 4

23 in '000 MKD Attributable to equity holders of the bank Total Legal Revaluati Share Share Capital reserv Retained on capital premium reserve e earnings reserve Balance at January 1, ,625 74,633-84, ,520 2,569 1,405,852 Total comprehensive income Profit for the year , ,139 Other comprehensive income, net of tax Revaluation of available-for-sale securities ,649 15,649 Total other comprehensive income for the year ,649 15,649 Total comprehensive income ,139 15, ,788 Transactions with owners of the Bank Contributions and distributions Distributed dividends from profit (12,648) - (12,648) Transfer to legal reserve Capital increase parent company, voting shares Total contributions and distributions (12,648) - (12,648) Balance at December 31, ,625 74,633-84, ,011 18,218 1,583,992 5

24 Cash Flow Statement In '000 MKD Note Cash flow statement from operating activities Profit for the year 209, ,139 Adjustments for: Depreciation of property and equipment 39 45,606 56,468 Written off property and equipment 39 23,999 51,685 Amortisation of intangible assets 38 5,065 18,789 Impairment losses , ,075 Interest income 25 (1,298,953) (1,311,353) Interest expenses , ,893 Interest receipts 2,688,618 2,449,588 Interest paid (434,500) (478,153) Cash flows/(outflows) from operating profits before changes in operating assets and liabilities 1,866,026 1,564,131 (Increase)/ Decrease in operating assets Restricted accounts 6,786 13,987 Balances with the NBRM (26,265) 74,265 Loans and advances to customers (1,923,991) (1,223,231) - Tax on non-deductable expenses - - Other assets 29,124 12,286 Increase/(Decrease) in operating liabilities - - Deposits from banks and other financial institutions (70) 5,555 Customers and other depositors 1,603,191 1,233,850 Other liabilities 22,936 22,085 Net cash from / (used in) operating activities () 1,577,737 1,702,928 Cash flows from investing activities Purchase of property, plant and equipment (295,902) (44,621) Proceeds from the sale of property, plant and equipment 3,001 3,185 Purchase of investment securities (1,022,845) (1,330,085) Proceeds from investment securities 184, ,250 Net cash (used in) / from investing activities (1,131,496) (1,187,271) Cash flows from financing activities Proceeds from borrowings 1,406, ,068 Repayments of borrowings (1,488,052) (1,007,547) Dividends paid (16,313) (12,648) Net cash from (used in) / financing activities ( 97,518) ( 51,127) Net increase in cash and cash equivalents 348, ,530 Cash and cash equivalents at beginning of year 2,694,424 2,229,894 Cash and cash equivalents at end of year 33 3,043,147 2,694,424 6

25 Notes to the Financial Statements A. Basis of Preparation 1) Compliance with International Financial Reporting Standards 2) Compliance with local law 3) Use of assumptions and estimates 4) Accounting developments B. Summary of Significant Accounting Policies 5) Measurement basis 6) Financial assets 7) Foreign currency translation 8) Cash and cash equivalents 9) Loans and receivables 10) Allowance for losses on loans and advances and impairment of available-for-sale financial assets 11) Intangible assets 12) Property, plant and equipment 13) Impairment of non-financial assets 14) Leases 15) Income tax 16) Liabilities to banks and customers 17) Provisions 18) Post-employment benefits and other employee benefits 19) Subordinated debt 20) Equity capital 21) Financial guarantee contracts 22) Interest income and expense 23) Fee and commission income and expenses 24) Dividend income C. Change in accounting estimate 25) Net interest income 26) Allowance for impairment losses on loans and advances 27) Net fee and commission income 28) Result from foreign exchange transactions 29) Net result from available-for-sale financial assets 30) Net other operating income 31) Personnel and other administrative expenses 32) Income tax expenses D. Notes to the Balance Sheet 33) Cash and cash equivalents 34) Loans and advances to banks 35) Available-for-sale financial assets 36) Loans and advances to customers 37) Allowance for losses on loans and advances 38) Intangible assets 39) Property, plant and equipment 40) Leasing 41) Income taxes 42) Other assets 43) Liabilities to banks 44) Liabilities to customers 45) Borrowings 46) Other liabilities 7

26 47) Provisions 48) Subordinated debt 49) Hybrid capital 50) Equity capital E. Risk Management 51) Management of the overall bank risk profile capital management 52) Management of individual risks 53) Credit risk 54) Financial risks 55) Operational risk F. Additional Notes 56) Fair value of financial instruments 57) Pledged assets 58) Contingent liabilities and commitments 59) Related party transactions 60) Management compensation 61) Significant post-balance sheet events 62) Exchange rates 63) Address and general information 8

27 Notes to the Financial Statements A. Basis of Preparation 1) Compliance with International Financial Reporting Standards ProCredit Bank AD Skopje ( the bank ) prepares its financial statements in accordance with the International Financial Reporting Standards (IFRS). The bank s financial statements for the year ended December 31, 2014 were prepared in accordance with the IFRS as issued by the IASB. Additionally, the interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) were applied. There was no early adoption of any standard not yet effective. Management prepared these financial statements on a going concern basis. In making this judgement management considered the bank s financial position, current intentions, profitability of operations and access to financial resources and analysed the impact of the recent financial crisis on future operations of the Bank. Functional and presentation currency All amounts are presented in thousands of Macedonian denars (MKD), unless otherwise stated. For computational reasons, the figures in the tables may exhibit rounding differences of ± one unit (MKD, %, etc.). The fiscal year of the bank is the calendar year. 2) Compliance with local law ProCredit Bank AD Skopje is a joint stock company. For supervisory purposes ProCredit Bank AD qualifies as a bank according to the Macedonian Banking Law and is therefore supervised by the National Bank of the Republic of Macedonia (NBRM). The bank s financial statements for the fiscal year 2014 were approved for issue by the Supervisory Board on 28 April ) Use of assumptions and estimates The bank s financial reporting and its financial results are influenced by accounting policies, assumptions, estimates, and management judgement which necessarily have to be made in the course of preparing the financial statements. All estimates and assumptions necessary for compliance with the IFRS are best estimates undertaken in accordance with the applicable standard. Estimates and judgements are evaluated on a continuous basis, and are based on past experience and other factors, including expectations with regard to future events and are considered appropriate under the given circumstances. Accounting policies and the management s judgement with respect to certain items are especially critical for the bank s results and financial situation due to their materiality in amount. This applies to the following positions: (a) Impairment of credit exposures The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired, on the level of the client exposure including related parties. 9

28 To determine an allowance for individually significant (large) impaired client exposure, the bank performed a detailed case-by-case analysis of the capacity and willingness of the borrower to service the obligation. The allowance reflects the difference between the carrying value of the loan/client exposure and the net present value of future cash flows that the bank expects to realize from the claim against the borrower, discounted at the financial asset s onetriginal effective interest rate. To determine the allowance for a collateralized financial asset the bank estimates future cash flows considering the cash flows that may result from foreclosure less costs for obtaining and selling the collateral. To determine the bank-wide rates to be applied for collective loan loss provisioning, the bank and ProCredit Holding performed an evaluation of the quality of the loan portfolio, taking into account historical loss experiences of most of the ProCredit institutions. This migration analysis is based on statistical data from 2000 until 2014 and therefore reflects both, average losses during a period of constant growth and favourable economic environments as well as average losses during the period of global recession in nearly all of the ProCredit group s countries of operation. To the extent that the net present value of estimated cash flows differs by +/- 0.5%, the provision would be estimated MKD 69,608 thousands higher or lower (2013: MKD 60,839 thousands). Further information on the bank s accounting policy on loan loss provisioning can be found in note (10) and note (53). (b) Impairment of repossessed property The Bank assesses the need for impairment of repossessed property yearly. If repossessed property has been impaired, the bank recognizes impairment losses for subsequent write-down of the asset to its fair value less cost to sell. 10

29 4) Accounting developments a) Standards, amendments and interpretations effective and adopted by the Bank in 2014 The following standards, amendments and interpretations have been issued by the IASB and have an impact on the bank s financial statements: Amendments to IAS 36 Recoverable Amount Disclosures for Non-Financial Assets have a minor impact on the disclosure of financial statements. The amendments to IAS 36 are applicable for annual periods beginning on or after 1 January b) Standards, amendments and interpretations effective in 2014 but not relevant for the Bank IFRS 10 Consolidated Financial Statements have a minor impact on the financial statements of the bank. The standard has changed the concept of control and consequently the determination which investees are consolidated. The application of IFRS 10 led to no changes. IFRS 10 is applicable for annual periods beginning on or after 1 January IFRS 12 Disclosures of Interests in Other Entities has an impact on the disclosure of financial statements. The standard is applicable for annual periods beginning on or after 1 January Amendments to IAS 32 Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities have a minor impact on the financial statements. The amendments to IAS 32 are applicable for annual periods beginning on or after 1 January The following standards, amendments and interpretations have been issued by the IASB and have no impact on the bank s financial statements: Amendments to IFRS 10, IFRS 12 and IAS 27 Investment Entities and Amendments to IAS 39 Novation of Derivatives and Continuation of Hedge Accounting have no impact on the financial statements. Both amendments are applicable for annual periods beginning on or after 1 January c) Standards, amendments and interpretations that are not yet effective and have not been early adopted by the Bank The following standards, amendments and interpretations have been issued by the IASB and will have an impact on the bank s financial statements. These were not applied in preparing these Financial Statements: Annual Improvements to IFRSs Cycle will have a minor impact on the financial statements of the bank. The improvements are applicable for annual periods beginning on or after 1 July Amendments to IAS 1: Disclosure Initiative will have a minor impact on the financial statements. The amendments will be effective for annual periods beginning on or after 1 January Annual Improvements to IFRSs Cycle might have a minor impact on the financial statements of the bank. The exposure draft proposes that the improvements will be effective for annual periods beginning on or after 1 July

30 IFRS 15 Revenue from Contracts with Customers might have a minor impact on the financial statements. IFRS 15 will be effective for annual periods beginning on or after 1 January IFRS 9 Financial Instruments (2014) will have an impact on the measurement and presentation of financial instruments. IFRS 9 is applicable for annual periods beginning on or after 1 January The following standards, amendments or interpretations were issued by the IASB but will not have an impact on the bank s financial statements: Annual Improvements to IFRSs , IFRIC 21 Levies, Amendments to IAS 19 Defined Benefit Plans: Employee Contributions, Amendments to IFRS 11 Accounting for Acquisitions of Interests in Joint Operations, Amendments to IAS 16 and IAS 38 Clarification of Acceptable Methods of Depreciation and Amortisation, Amendments to IAS 16 and IAS 41 Bearer plants, IFRS 14 Regulatory Deferral Accounts, Amendments to IFRS 10 and IAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture, Amendments to IFRS 10, IFRS 12 and IAS 28 Investment Entities: Applying the Consolidation Exception, Amendments to IAS 27 Equity Method in Separate Financial Statements. There was no early adoption of any standards, amendments and interpretations not yet effective. 12

31 B. Summary of Significant Accounting Policies The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 5) Measurement basis These financial statements were prepared under the historical cost convention, unless IFRS require recognition at fair value. Financial instruments measured at fair value for accounting purposes on an ongoing basis include all instruments classified as available-for-sale. The measurement techniques applied to the balance sheet positions are specified in the accounting policies listed below. A fair value measurement assumes that the asset or liability is exchanged in an orderly transaction between market participants to sell the asset or transfer the liability at the measurement date under current market conditions. A fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place either: a. in the principal market for the asset or liability; or b. in the absence of a principal market, in the most advantageous market for the asset or liability. The IFRS define a so-called hierarchy of fair value determination which reflects the relative reliability of different methods of determining fair value: (a) Active market: Quoted price (Level 1) Observe quoted prices (unadjusted) for identical financial instruments in active markets, that the entity can access at the measurement date. (b) Valuation technique using observable inputs (Level 2) Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Observe quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets or use valuation models where all significant inputs are observable. (c) Valuation technique with significant non-observable inputs (Level 3) Use valuation models where one or more significant inputs are not observable. Only if the first best method of determining the fair value is not available may the next best determination method be applied. If possible, the bank obtains fair values from quoted market prices; otherwise, the next best available measurement technique is applied. 6) Financial assets The bank classifies its financial assets in the following categories: loans and receivables and available-for-sale financial assets. The bank holds no held-to-maturity instruments. Management determines the classification of financial assets at initial recognition. (a) Loans and receivables from customers Loans and receivables from customers are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the bank provides money, goods or services directly to a debtor with no intention of trading the receivable. 13

32 Loans and receivables from customers are recorded when the bank advances money to purchase or originate an unquoted non-derivative receivable from a customer due on fixed or determinable dates, and has no intention of trading the receivable. Loans and receivables to customers are carried at amortized cost using the effective interest method. At each balance sheet date and whenever there is evidence of potential impairment, the bank assesses the value of its loans and receivables. Their carrying amount may be reduced as a consequence through the use of an allowance account (see note (10) for the accounting policy for impairment of credit exposures, and notes (26), (37), and (53) for details regarding impairment of credit exposures). If the amount of the impairment loss decreases, the impairment allowance is reduced accordingly, and the amount of the reduction is recognised in the profit or loss. The upper limit on the reduction of the impairment is equal to the amortised costs which would have been incurred as of the valuation date if there had not been any impairment. Loans are recognised when the principal is advanced to the borrowers. Loans and receivables are derecognised when the rights to receive cash flows from the financial assets have expired or when the bank has transferred substantially all risks and rewards of ownership. (b) Available-for-sale financial assets Available-for-sale assets are those intended to be held for an indefinite amount of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. At initial recognition, available-for-sale financial assets are recorded at fair value, which is the cash consideration including transaction costs. Subsequently they are carried at fair value. The fair values reported are either observable market prices in active markets or values calculated with a valuation technique based on currently observable market data. For very short-term financial assets it is assumed that the fair value is best reflected by the transaction price itself. Gains and losses arising from changes in fair value of available-for-sale financial assets are recognised directly in equity in other comprehensive income in the position Revaluation reserve from available-for-sale financial assets, until the financial asset is derecognised or impaired (for details on impairment, see note (10)). At this time, the cumulative gain or loss previously recognised in equity in other comprehensive income is recognised in profit or loss as Gains and losses from available-for-sale financial assets. Interest calculated using the effective interest rate method and foreign currency gains and losses on monetary assets classified as available-for-sale are recognised in the profit or loss. Dividends on available-for-sale equity instruments are recognised in the profit or loss when the entity s right to receive the payment is established. Purchases and sales of available-for-sale financial assets are recorded on the trade date. The available-for-sale financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or when the bank has transferred substantially all risks and rewards of ownership. 7) Foreign currency translation (a) Functional and presentation currency Items included in these financial statements are measured in Macedonian denars (MKD), which is the functional and presentation currency of the bank. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the 14

33 settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the profit or loss (trading result). Monetary items denominated in foreign currency are translated with the closing rate as of the reporting date. In the case of changes in the fair value of monetary assets denominated in foreign currency classified as available for sale, a distinction is made between translation differences resulting from changes in the amortised cost of the security and other changes in the carrying amount of the security. Translation differences related to changes in the amortised cost are recognised in profit or loss, while other changes in the carrying amount are recognised in equity. Non-monetary items measured at historical cost denominated in foreign currency are translated with the exchange rate as of the date of initial recognition. The reporting exchange rates and average rates for the period used in the balance sheet and the profit or loss are listed in section (61) of these notes. 8) Cash and cash equivalents For the purposes of the balance sheet, cash and cash equivalents comprise cash, balances with less than three months maturity from the date of acquisition from the NBRM, treasury bills and other money market instruments that are highly liquid and readily convertible to known amounts of cash with insignificant risk of changes in value and bills of exchange. Funds restricted for a period of more than three months on origination are excluded from cash and cash equivalents. Cash and cash equivalents are carried at amortised cost. For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months maturity from the date of acquisition, including: cash and non-restricted balances with central banks (minimum reserve balances are included under restricted balances), non-pledged treasury bills and other bills eligible for refinancing with central banks and loans and advances to banks and amounts due from other banks. 9) Loans and advances to banks The amounts reported under Loans and advances to banks consist mainly of loans and advances issued. In addition to overnight and term deposits, the amounts reported under receivables from banks include current account balances. All loans and advances to banks are carried at amortised cost, using the effective interest method. Amortised premiums and discounts are accounted for over the respective terms in the profit or loss under Net interest income. Impairment of loans and receivables to banks is recognised on separate allowance accounts. For the purposes of the cash flow statement, claims to banks with a remaining maturity of less than three months from the date of acquisition are recognised under Cash and cash equivalents (see note (33)). 10) Allowance for losses on loans and advances and impairment of availablefor-sale financial assets (a) Assets carried at amortised cost loans and advances Impairment of loans and advances The bank assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. If there is objective evidence that impairment of 15

34 a credit exposure or a portfolio of credit exposures has occurred, as a result of one or more events that occurred after the initial recognition of the asset (a loss event ), which influences the future cash flow of the financial asset(s), the respective losses, that can be reliabily estimated, are immediately recognised. Depending on the size of the credit exposure, such losses are either calculated on an individual credit exposure basis or are collectively assessed for a portfolio of credit exposures. The carrying amount of the loan is reduced through the use of an allowance account and the amount of the loss is recognised in the profit or loss. (i) Individually assessed loans and advances Credit exposures are considered individually significant if the sum of the on-balance sheet part, and, if approved / authorised, the off-balance sheet part exceeds EUR 30,000. For such credit exposures, it is assessed whether objective evidence for impairment exists, i.e. any factors which might influence the customer s ability to fulfil his or her contractual payment obligations towards the bank: - delinquencies in contractual payments of interest or principal; - breach of covenants or conditions; - initiation of bankruptcy proceedings; - specific information on the customer s business (e.g. reflected by cash flow difficulties experienced by the client) changes in the customer s market environment - the general economic situation; - the value of collateral significantly decreases as a result of deteriorating market conditions In exceptional cases, an individual assessment can also be carried out for credit exposures below EUR 30,000 if they show signs of impairment despite being below 30 days in arrears. Additionally, the aggregate exposure to the client and the realisable value of collateral held are taken into account when deciding on the allowance for impairment. If there is objective evidence that an impairment loss has been incurred (specific impairment),, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of its estimated future cash flows discounted at the financial asset s original effective interest rate (specific impairment). If a credit exposure has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral. Collectively assessed loans and advances: There are two cases in which credit exposures are collectively assessed for impairment: - individually insignificant credit exposures that show objective evidence of impairment; - the group of credit exposures which do not show signs of impairment, in order to cover all losses which have already been incurred but not detected on an individual credit exposure basis. For the purposes of the evaluation of impairment of individually insignificant credit exposures, the credit exposures are grouped on the basis of similar credit risk characteristics, i.e. according to 16