VOJVOĐANSKA BANKA A.D., NOVI SAD. Financial Statements Year Ended December 31, 2017 and Independent Auditors Report

Transcription

1 VOJVOĐANSKA BANKA A.D., NOVI SAD Financial Statements Year Ended December 31, 2017 and Independent Auditors Report

2 VOJVOĐANSKA BANKA A.D., NOVI SAD CONTENTS Page Independent Auditors' Report 1 Financial Statements: Statement of Financial Position 2 Income Statement 3 Statement of Other Comprehensive Income 4 Statement of Changes in Equity 5 Statement of Cash Flows 6 Notes to the Financial Statements Appendix: Annual Business Report

3 INDEPENDENT AUDITORS REPORT To the Board of Directors and Owners of Vojvođanska banka a.d., Novi Sad We have audited the accompanying Vojvođanska banka a.d., Novi Sad (hereinafter: the Bank ) enclosed on pages 2 to 112, which comprise the statement of the financial position as of December 31, 2017 and the related income statement, statement of other comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with the International Financial Reporting Standards, as well as 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 the Law on Audit and standards on auditing applicable in the Republic of Serbia. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from 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 the auditor s 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, the auditor considers 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 policies 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 audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the Bank as at December 31, 2017, and its financial performance and cash flows for the year then ended in accordance with the International Financial Reporting Standards. Report on Other Legal and Regulatory Requirements Management of the Bank is responsible for the preparation of the annual business report in accordance with the requirements of the Law on Accounting of the Republic of Serbia. In accordance with the Law on Audit of the Republic of Serbia and Decision on Amendments and Supplements to the Decision on External Audit of Banks, it is our responsibility to express an opinion on the compliance of the Bank's annual business report for the year 2017 with its audited financial statements for the same financial year. In our opinion, the financial information disclosed in the annual business report for 2017 is consistent with the Bank's audited financial statements for the year ended December 31, Belgrade, March 15, 2018 Nada Suđić Certified Auditor

4 VOJVOĐANSKA BANKA A.D., NOVI SAD STATEMENT OF FINANCIAL POSITION As of December 31, 2017 (Thousands of RSD) December 31, 2017 December 31, 2016 Note ASSETS Cash and balances held with the central bank 20 21,416,477 20,922,329 Financial assets at fair value through profit and loss, held for trading 21 39,569 36,958 Financial assets available for sale 22 16,268,461 21,918,248 Financial assets held to maturity 23 59, ,950 Loans and receivables due from banks and other financial institutions 24 5,729,058 6,577,452 Loans and receivables due from customers 25 73,504,393 69,925,874 Intangible assets , ,050 Property, plant and equipment 27 4,248,264 4,399,455 Investment property , ,587 Non-current assets held for sale and assets from discontinued operations Deferred tax assets , ,184 Other assets , ,794 Total assets 122,727, ,897,999 LIABILITIES Financial assets at fair value through profit and loss, held for trading 31 17,392 17,901 Deposits and other liabilities due to banks, other financial institutions and the central bank 32 6,030,108 5,849,696 Deposits and other liabilities due to customers 33 97,149,605 98,559,912 Provisions , ,053 Current tax liabilities 16 1,447 11,134 Deferred tax liabilities 17 83, ,118 Other liabilities , ,166 Total liabilities 104,758, ,921,980 EQUITY Issued (share) capital 36 16,337,550 16,337,550 Retained earnings ,037 Accumulated losses 36 2,107,478 - Reserves 37 3,739,657 3,337,432 Total equity 17,969,729 19,976,019 TOTAL LIABILITIES AND EQUITY 122,727, ,897,999 Notes on pages 7 to 112 form an integral part of these financial statements These financial statements were submitted to the Serbian Business Registers Agency for statistical purposes on February 21, 2018 and approved by management of Vojvođanska banka a.d., Novi Sad on March 15, Signed on behalf of Vojvođanska banka a.d., Novi Sad by: Predrag Mihajlović Spyridon Ntallas Svjetlana Radoš Executive Board President Executive Board Member/CFO Head of Statutory Reporting Dpt. Translation of the Auditors' Report issued in the Serbian language 2

5 VOJVOĐANSKA BANKA A.D., NOVI SAD INCOME STATEMENT Year Ended December 31, 2017 (Thousands of RSD) Note Interest income 5 5,620,328 6,079,768 Interest expenses 5 (817,138) (1,208,621) Net interest income 5 4,803,190 4,871,147 Fee and commission income 6 1,928,842 1,822,751 Fee and commission expenses 6 (168,990) (187,846) Net fee and commission income 6 1,759,852 1,634,905 Net gains on the financial assets held for trading 7 7,279 21,997 Net gains on contractual risk hedges 8-2,094 Net losses on contractual risk hedges Net gains on the financial assets available for sale 9 45,768 75,865 Net foreign exchange gains and positive currency clause effects , ,624 Other operating income , ,079 Net losses on impairment of financial assets and credit riskweighted off-balance sheet assets 12 (2,263,153) (730,580) Total operating income, net 4,919,389 6,459,131 Staff costs 13 (2,399,855) (2,453,371) Amortization and depreciation charge 14 (336,972) (327,597) Other expenses 15 (4,240,699) (3,334,669) Profit before taxes - 343,494 Loss before taxes (2,058,137) - Current income tax expenses 16 (1,447) (11,134) Deferred tax benefits 16 90,243 4,359 Deferred tax expenses 16 (138,137) (35,682) Profit for the year - 301,037 Loss for the year (2,107,478) - Basic earnings per share Notes on pages 7 to 112 form an integral part of these financial statements These financial statements were submitted to the Serbian Business Registers Agency for statistical purposes on February 21, 2018 and approved by management of Vojvođanska banka a.d., Novi Sad on March 15, Signed on behalf of Vojvođanska banka a.d., Novi Sad by: Predrag Mihajlović Spyridon Ntallas Svjetlana Radoš Executive Board President Executive Board Member/CFO Head of Statutory Reporting Dpt. Translation of the Auditors' Report issued in the Serbian language 3

6 VOJVOĐANSKA BANKA A.D., NOVI SAD STATEMENT OF OTHER COMPREHENSIVE INCOME Year Ended December 31, 2017 (Thousands of RSD) Profit for the year - 301,037 Loss for the year 2,107,478 - Other comprehensive income Actuarial gains (Note 39) 9,234 21,109 Positive effects of fair value adjustments of financial assets available for sale 109,809 - Unrealized losses on securities available for sale - 34,259 Tax benefits relating to the other comprehensive income - 1,972 Tax expenses relating to the other comprehensive income 17,855 - Other negative comprehensive income, net of taxes - 11,178 Other positive comprehensive income, net of taxes 101,188 - Total positive comprehensive income for the year - 289,859 Total negative comprehensive income for the year 2,006,290 - Notes on pages 7 to 112 form an integral part of these financial statements These financial statements were approved by management of Vojvođanska banka a.d., Novi Sad on March 15, Signed on behalf of Vojvođanska banka a.d., Novi Sad by: Predrag Mihajlović Spyridon Ntallas Svjetlana Radoš Executive Board President Executive Board Member/CFO Head of Statutory Reporting Dpt. Translation of the Auditors' Report issued in the Serbian language 4

7 VOJVOĐANSKA BANKA A.D., NOVI SAD STATEMENT OF CHANGES IN EQUITY Year Ended December 31, 2017 (Thousands of RSD) Share Capital Share Premium Reserves from Profit and Other Reserves Revaluation Reserves Profit / Loss Total Balance at January 1, ,337, ,172, ,356 34,471 19,686,160 Comprehensive income Profit for the year , ,037 Previous year s profit distribution ,471 - (34,471) , , ,037 Other negative comprehensive income, net of taxes (11,178) - (11,178) Balance at December 31, ,337, ,207, , ,037 19,976,019 Comprehensive income Loss for the year (2,107,478) (2,107,478) Previous year s profit distribution ,037 - (301,037) ,037 - (2,408,515) (2,107,478) Other positive comprehensive income, net of taxes , ,188 Balance at December 31, ,337, ,508, ,366 (2,107,478) 17,969,729 Notes on pages 7 to 112 form an integral part of these financial statements These financial statements were approved by management of Vojvođanska banka a.d., Novi Sad on March 15, Signed on behalf of Vojvođanska banka a.d., Novi Sad by: Predrag Mihajlović Spyridon Ntallas Svjetlana Radoš Executive Board President Executive Board Member/CFO Head of Statutory Reporting Dpt. Translation of the Auditors' Report issued in the Serbian language 5

8 VOJVOĐANSKA BANKA A.D., NOVI SAD STATEMENT OF CASH FLOWS Year Ended December 31, 2017 (Thousands of RSD) ITEM CASH FLOWS FROM OPERATING ACTIVITIES Cash inflows from operating activities 8,295,470 8,246,626 Interest receipts 6,222,784 6,266,444 Fee and commission receipts 1,955,487 1,757,433 Receipts of other operating income 116, ,035 Dividend and profit sharing receipts ,714 Cash outflows from operating activities 7,330,886 7,445,162 Interest payments 864,202 1,283,189 Fee and commission payments 170, ,471 Payments to, and on behalf of employees 2,450,569 2,403,421 Taxes, contributions and other duties paid 813, ,866 Payments for other operating expenses 3,032,204 2,794,215 Net cash inflows from operating activities prior to increases/decreases in loans and deposits and other liabilities 964, ,464 Decrease in loans and increase in deposits received and other liabilities 6,140,797 4,993,780 Decrease in loans and receivables due from banks, other financial institutions, the central bank and customers - 1,599,277 Decrease in financial assets initially recognized at fair value through profit and loss, financial assets held for trading and other securities not held for investments 6,140,797 - Increase in deposits and other liabilities due to banks, other financial institutions, the central bank and customers - 3,394,503 Increase in loans and decrease in deposits received and other liabilities 7,536,897 10,209,527 Increase in loans and receivables due from banks, other financial institutions, the central bank and customers 6,090,309 - Increase in financial assets initially recognized at fair value through profit and loss, financial assets held for trading and other securities not held for investments - 10,182,315 Decrease in deposits and other liabilities due to banks, other financial institutions, the central bank and customers 1,446,079 - Decrease in financial liabilities initially recognized at fair value through profit and loss and financial liabilities held for trading ,212 Net cash used in operating activities before income taxes 431,516 4,414,283 Income tax paid Dividend paid 11,134 7,828 Net cash used in operating activities 422,650 4,422,111 CASH FLOWS FROM INVESTING ACTIVITIES Cash inflows from investing activities 38, ,496 Proceeds from the sales of investments in subsidiaries, associates and joint ventures - 230,010 Proceeds from the sales of intangible assets, property, plant and equipment 35,549 8,128 Proceeds from the sales of investment property 2, ,224 Other inflows from investing activities ,134 Cash outflows from investing activities 282, ,656 Outflows per investments made in investment securities Cash used for the purchases of intangible assets, property, plant and equipment 275, ,395 Cash used for the purchases of investment property 7,521 23,261 Net cash generated by investing activities - 34,840 Net cash used in investing activities 244,399 - CASH FLOWS FROM FINANCING ACTIVITIES Cash inflows from financing activities 264,718 1,743,950 Borrowings, inflows 264,718 1,743,950 Net cash generated by financing activities 264,718 1,743,950 TOTAL CASH INFLOWS 14,739,275 15,423,852 TOTAL CASH OUTFLOWS 15,161,606 18,067,173 NET CASH DECREASE 422,331 2,643,321 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 17,868,930 20,117,533 FOREIGN EXCHANGE GAINS 455, ,621 CASH AND CASH EQUIVALENTS, END OF YEAR 17,901,733 17,868,833 Notes on pages 7 to 112 form an integral part of these financial statements These financial statements were approved by management of Vojvođanska banka a.d., Novi Sad on March 15, Signed on behalf of Vojvođanska banka a.d., Novi Sad by: Predrag Mihajlović Spyridon Ntallas Svjetlana Radoš Executive Board President Executive Board Member/CFO Head of Statutory Reporting Dpt. Translation of the Auditors' Report issued in the Serbian language 6

9 1. Corporate Information (hereinafter the Bank ) was established on 31 December by the transformation of Vojvodjanska banka Udruzena banka (Associated Bank), Novi Sad. In 1995 the Bank changed its legal form into a joint stock company and became. On 30 December 2001, in accordance with its Articles of Incorporation and the Decision of the Bank s General Assembly, the Bank merged with Srpska razvojna banka a.d. Belgrade and Uzicka banka a.d. Uzice. In December 2006, in accordance with the terms of the Agreement on the Purchase and Sale of Share Capital, the National Bank of Greece, Athens became the major owner of the Bank by acquiring an equity interest of 99.43%. The aforementioned acquisition was duly registered with the Central Securities Depository and Clearing House on 12 December On 25 October 2007 the National Bank of Greece, Athens, conducted the mandatory purchase of the remaining 1,727 shares and became the sole owner of the Bank. On 7 December 2007, the Bank was excluded from the Belex list at its own request. The Bank is registered in the Republic of Serbia as a joint stock company for provision of banking services associated with payment transfers, credit and deposit activities in the country and abroad, and it operates in accordance with the Republic of Serbia s Law on Banks. In accordance with the Decision brought by the Bank s Assembly on 3 January 2008, the Bank merged with the National Bank of Greece a.d. Belgrade. The aforementioned status change of merger by absorption of the National Bank of Greece a.d. Belgrade was registered in the Serbian Business Registers Agency on 14 February 2008 under the number BD 6190/2008 (removal of the business entity the National Bank of Greece a.d. Belgrade as the acquired bank), as well as the change in equity structure of the Bank (Decision number BD 6210/2008). The National Bank of Greece a.d. Belgrade was entirely owned by the National Bank of Greece, Athens and continued its operations under the name of. As of 01 December 2017, OTP Bank Serbia a.d Novi Sad (hereinafter: Parent Bank or Owner ) became 100% owner of Vojvodjanska Banka a.d Novi Sad. From 01 December Bank is member of OTP group. The Bank s Head Office is located in Novi Sad, 7, Trg Slobode. As of 31 December 2017, the Bank operated through its Head Office located in Novi Sad and 105 branches (31 December 2016: 106 branches). As of 31 December 2017, the Bank had 1,473 employees (31 December 2016: 1,468 employees). The Bank s registration number is Its tax identification number is As of 31 December 2017, the Board of Directors consisted of the following members: - Gábor Kolics Director of Acquisitions and Coordination Department OTP Group - Imre Bertalan Managing Director of Human Resources Management Directorate of OTP Bank - Ferenc Böle IT Project management, IT subsidiary management and IT Architecture of OTP - Peter Bese Head of International Retail banking of OTP - Darko Spasic Lawyer, one of the owners of Spasic i partneri o.d. - Milan Parivodic Lawyer, Foreign Investors Services d.o.o. The Board of Directors members are elected by the General Assembly, in accordance with valid Statute of limitations. Members are elected for the period of 3 years with the re-election option. The financial statements are adopted by the Bank s General Assembly. 7

10 2. Basis of Preparation and Presentation of the Financial Statements 2.1 Basis of Preparation and Presentation of the Financial Statements Legal entities and entrepreneurs incorporated in Serbia are required to maintain their books of account, to recognize and value assets and liabilities, income and expenses, and to present, submit and disclose financial statements in conformity the Law on Accounting (hereinafter referred to as the Law, Official Gazette of the Republic of Serbia no. 63/2013). As a large legal entity, the Bank is required to apply International Financial Reporting Standards ( IFRS ), which as per the aforementioned law comprise the following: the Framework for the Preparation and Presentation of Financial Statements (the Framework ), International Accounting Standards ( IAS ), International Financial Reporting Standards ( IFRS ), as well as the related interpretations issued by the International Financial Reporting Interpretations Committee ( IFRIC ) and additional related interpretations issued by the International Accounting Standards Board ( IASB ), the translations of which to the Serbian language were approved and issued by the competent Ministry of Finance. In addition, in accordance with the Amendments and Supplements to the Law on Banks (Official Gazette of the Republic of Serbia no. 14/2015), upon preparation of the annual financial statements, banks in the Republic of Serbia are obligated to apply the International Financial Reporting Standards, subsequent revisions and amendments thereto and related interpretations as from their issue date by the competent authorities. The accompanying financial statements are presented in the format prescribed under the Decision on the Forms and Contents of the Items in the Forms of the Financial Statements of Banks (Official Gazette of RS nos. 71/2014 and 135/2014). These financial statements were prepared at historical cost principle, except for the measurement of the following significant balance sheet items: financial assets available for sale stated at fair value; derivative financial instruments stated at fair value; and financial assets and liabilities held for trading stated at fair value. Historical cost is generally based on the fair value of consideration paid in exchange for goods and services. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between the market participants at the measurement date under current market conditions regardless of whether that price is directly observable or estimated using another valuation technique. Upon estimating the fair value of assets or liabilities, the Bank takes into account characteristics of assets or liabilities that other market participants would also consider upon determining the price of assets or liabilities at the measurement date. Fair value for measurement and/or disclosure purposes in the accompanying financial statements was determined in the aforesaid manner, except for share-based payment transactions, which are in the scope of IFRS 2, leasing transactions, which are in the scope of IAS 17, and measurements that have some similarities to fair value but are not fair value, such as the net realizable value in IAS 2 or value in use in IAS 36. In addition, for financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; 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; and Level 3 inputs are unobservable inputs for the asset or liability. The Bank s financial statements are stated in thousands of dinars unless it is otherwise stated. Dinar (RSD) represents the Bank s functional and presentation currency. All transactions denominated in other than functional currencies are treated as foreign currency transactions. In the preparation of the accompanying financial statements, the Bank adhered to the accounting policies described in Note 3. Standards and interpretations issued that came into effect in the current period, as well as the standards and interpretations in issue but not yet in effect are disclosed hereinafter in Note 2. 8

11 2. Basis of Preparation and Presentation of the Financial Statements (Continued) 2.1 Basis of Preparation and Presentation of the Financial Statements (Continued) Initial application of new standards and amendments to the existing standards effective for the current reporting period The following new standards and amendments to the existing standards issued by the International Accounting Standards Board (IASB) have been effective over the current reporting period: Amendments to IAS 7 Statement of Cash Flows Disclosure Initiative (effective for annual periods beginning on or after January 1, 2017); Amendments to IAS 12 Income Taxes - Recognition of Deferred Tax Assets for Unrealized Losses (effective for annual periods beginning on or after January 1, 2017); and Amendments to IFRS 12 due to Improvements to IFRSs (cycle ) resulting from the annual improvement project of IFRS (IFRS 1, IFRS 12 and IAS 28) primarily with a view to removing inconsistencies and clarifying wording (amendments to IFRS 12 are to be applied for annual periods beginning on or after January 1, 2017). Adoption of these amendments to the existing standards has not led to any material changes in the Bank s financial statements. New standards and amendments to the existing standards in issue not yet adopted At the date of authorization of these financial statements the following new standards, amendments to the existing standards and new interpretations were in issue but not yet effective: IFRS 9 Financial Instruments (effective for annual periods beginning on or after January 1, 2018); IFRS 15 Revenue from Contracts with Customers and further amendments (effective for annual periods beginning on or after January 1, 2018); IFRS 16 Leases (effective for annual periods beginning on or after January 1, 2019); IFRS 17 Insurance Contracts (effective for annual periods beginning on or after January 1, 2021); Amendments to IFRS 2 Share-based Payment - Classification and Measurement of Share-based Payment Transactions (effective for annual periods beginning on or after January 1, 2018); Amendments to IFRS 4 Insurance Contracts - Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (effective for annual periods beginning on or after January 1, 2018or when IFRS 9 Financial Instruments is applied first time); Amendments to IFRS 9 Financial Instruments - Prepayment Features with Negative Compensation (effective for annual periods beginning on or after January 1, 2019); Amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures - Sale or Contribution of Assets between an Investor and its Associate or Joint Venture and further amendments (effective date deferred indefinitely until the research project on the equity method has been concluded); Amendments to IAS 19 Employee Benefits - Plan Amendment, Curtailment or Settlement (effective for annual periods beginning on or after January 1, 2019); Amendments to IAS 28 Investments in Associates and Joint Ventures - Long-term Interests in Associates and Joint Ventures (effective for annual periods beginning on or after January 1, 2019); Amendments to IAS 40 Investment Property - Transfers of Investment Property (effective for annual periods beginning on or after January 1, 2018); Amendments to IFRS 1 and IAS 28 due to Improvements to IFRSs (cycle ) resulting from the annual improvement project of IFRS (IFRS 1, IFRS 12 and IAS 28) primarily with a view to removing inconsistencies and clarifying wording (amendments to IFRS 1 and IAS 28 are to be applied for annual periods beginning on or after January 1, 2018); Amendments to various standards due to Improvements to IFRSs (cycle ) resulting from the annual improvement project of IFRS (IFRS 3, IFRS 11, IAS 12 and IAS 23) primarily with a view to removing inconsistencies and clarifying wording (effective for annual periods beginning on or after January 1, 2019); IFRIC 22 Foreign Currency Transactions and Advance Consideration (effective for annual periods beginning on or after January 1, 2018); and IFRIC 23 Uncertainty over Income Tax Treatments (effective for annual periods beginning on or after January 1, 2019). 9

12 2. Basis of Preparation and Presentation of the Financial Statements (Continued) 2.1 Basis of Preparation and Presentation of the Financial Statements (Continued) New standards and amendments to the existing standards in issue not yet adopted (Continued) The Bank s management has elected not to adopt these new standards, amendments to existing standards and new interpretations in advance of their effective dates. The management anticipates that the adoption of these Standards, amendments to existing standards and new interpretations will have no material impact on the financial statements of the Bank in the period of initial application. The accounting policies and estimates used in preparation of these financial statements are consistent with the those applied upon preparation of the Bank's annual financial statements for 2016, except for newly adopted IFRS, their amendments and interpretations, the application of which had no effect on the Bank's financial position or performance. Preparation of the financial statements in accordance with IFRS requires the Bank s management to make certain key accounting estimates. It also requires management to use their judgement in applying the Bank s accounting policies. The areas demanding greater extent of or more complex judgements, i.e., areas where assumptions and estimates are material to the financial statements are disclosed in Note 2.2. Use of Estimates Preparation of the financial statements in accordance with IFRS requires the Bank s management to make the best possible estimates and reasonable assumptions that affect the application of the accounting policies and the reported amounts of assets and liabilities, as well as income and expenses arising during the accounting period. These estimations and assumptions are based on information available as of the of the financial statements preparation date. Actual results may vary from these estimates. Estimates and assumptions are subject to constant review and when adjustments become necessary, they are stated within the income statement for periods in which they became known. IFRS 9 Disclosure The Bank analysed the estimated impact of the application of IFRS 9 in accordance with IAS 8, paragraph and it is presented in the financial statements the following way. IFRS 9 Financial Instruments replaces IAS 39 "Financial Instruments: Recognition and Measurement" for annual reporting periods commencing on or after 1 January It contains changes to the requirements relating to the recognition and measurement, impairment, derecognition and hedge accounting. The Bank started its preparation for IFRS 9 actively in 2016, led by the Bank s Risk Management and Finance Divisions, and during 2017 much of the preparation was finalized centrally. The preparations covered the key challenges that the Bank faces with the new standard. Revised model of hedge accounting, as one of the changes that were introduced by IFRS 9, was not it the scope of the project since hedge accounting is not applicable for the Bank. 1. Classification and measurement IFRS 9 introduced a new approach for the classification of financial assets driven by cash flow characteristics and the business model in which an asset is held. The Bank recognizes the financial liabilities on amortized cost except in those cases when the standard requires otherwise, or according to the fair value option the entity chose to recognize the financial instrument on the fair value through profit or loss. Preliminary analyses of the business models and contractual cash flows on the Bank s significant portfolios were performed to determine by product segments those financial instruments that would be measured at amortised cost, at fair value through profit or loss, or at fair value through Profit or Loss and Other Comprehensive Income. The Bank has no loans measured at fair value at the date January 1,

13 2. Basis of Preparation and Presentation of the Financial Statements (Continued) 2.1 Basis of Preparation and Presentation of the Financial Statements (Continued) IFRS 9 Disclosure (Contunued) 2. Impairment IFRS 9 introduced an expected credit loss impairment model instead of the previously applied incurred loss model that requires a more timely recognition of credit losses. The standard requires entities to account for expected credit losses from the moment when financial instruments are first identified. The use of a new, three stage model was implemented for IFRS 9 purposes. The new impairment methodology is used to classify financial instruments in order to determine whether credit risk has significantly increased since initial recognition and able to identify credit-impaired assets. For instruments with credit-impairment or significant increase of credit risk, lifetime expected losses will be recognized. The increased credit-impairment is identified by transactions on the basis of predetermined conditions and beyond this the estimation is made on a portfolio level. Assets where no significant increase of credit risk has been identified will be provisioned based on a 12-month expected loss methodology. For purchased or originated credit-impaired financial assets, the same lifetime expected loss methodology was extended in order to be able to capture the cumulative changes in lifetime expected credit losses since the initial recognition as a credit-impaired instrument. The Bank chose the use of the simplified impairment approach for trade receivables and contract assets. The Bank, together with the OTP Group, started to further improve its risk management definitions, processes and methodological analysis in line with the expectations of IFRS 9. The Bank has started developing the methodology using the behavioural scoring model for the identification of significant increase of credit risk and the calculation of expected credit losses through the use of IFRS 9 compliant risk parameters. Based on a gap analyses and the changes in methodology, the main principles regarding the IT solutions for IFRS 9 implementation were laid down. Preliminary specifications were prepared and IT implementation was mostly completed in 2017, although there are ongoing aspects such as rating/scoring models for significant portfolios, where the developments have not yet been finished. The IFRS 9 implementation project was driven by the Group headquarters. The unified methodology and the initial parameter estimation was developed and delivered centrally. The rollout of the calculations to the subsidiaries is ongoing and at the time of issue of these financial statements had not been completed 2.2 Comparative Figures Comparative figures represent the audited financial statements of the Bank as of and for the year ended 31 December 2016, prepared and presented in accordance with IFRS and the valid forms of the financial statements. In accordance with the Decision on Form and Content of Items in Forms of the Financial Statements for Banks ( RS Official Gazette, no. 71/2014 and 135/2014), the National Bank of Serbia has prescribed the forms of financial statements and content of items presented in the balance sheet, income statement, statement of other comprehensive income, statement of changes in equity and statement of cash flows. 2.3 Going Concern The accompanying financial statements of the Bank are prepared in accordance with the going concern principle, which assumes that the Bank will continue its operations in the foreseeable future. 11

14 2. Basis of Preparation and Presentation of the Financial Statements (Continued) 2.4 Functional and Reporting Currency Items included in the financial statements of the Bank are expressed in RSD thousand, unless otherwise stated. Dinar (RSD) is the functional and official reporting currency in the Republic of Serbia. All transactions in currencies that are not functional currency are considered to be transactions in foreign currency. 2.5 Use of Estimates The preparation of the financial statements in accordance with the IFRS requires that the Bank s management makes best estimates and reasonable assumptions that affect assets and liabilities amounts at the date of preparation of the financial statements, as well as the income and expenses arising during the reporting period. These estimates and related assumptions are based on information available as of the date of preparation of the financial statements. Actual results could deviate from those estimates. These estimates and underlying assumptions are reviewed on an ongoing basis, and changes in estimates are recognized in the periods in which they become known. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are materially significant to the financial statements are disclosed in Note Reconciliation of Receivables and Liabilities Pursuant to Article 18 of the Law on Accounting, the Bank performed reconciliation of receivables and payables with its debtors and creditors, and it maintains credible documentation on the circularization process. The Bank submitted the confirmations to its customers and debtors with the outstanding balance of receivables/payables as of 31 October In addition, during the course of the annual audit, the independent confirmation procedure with the major customers was performed as of 31 December Based on the exchanged confirmations, the total amounts of non-reconciled confirmations relating to balance sheet assets is RSD 1,867 thousand. Moreover, confirmations returned due to the failure in delivering include the amount of RSD 60,102 thousand. 2.7 Consolidated Financial Statements As of 31 December 2017, the Bank has no control over other legal entities, and accordingly, does not prepare the consolidated financial statements. 12

15 3. Summary of Significant Accounting Policies 3.1. Interest Income and Expense Interest income and expense, including penalty interest and other income and other expenses from interest bearing assets, i.e., liabilities are recognized on an accrual basis based on obligatory terms defined by a contract signed between the Bank and a customer. For all financial instruments that are interest bearing, interest income or interest expense are recorded in the income statement using the effective interest rate applicable, which is the rate that exactly discounts estimated future cash payments or receipts over the expected life of the financial instrument or, when appropriate, over the shorter period, to the net carrying amount of the financial asset or financial liability. Interest income includes interest on loans and advances to customers, coupons earned on fixed income investment and trading securities and accrued discount and premium on treasury bills and other instruments. Fees and direct costs relating to a loan origination or acquiring a security, financing or restructuring and to loan commitments are deferred and amortised to interest income over the life of the instrument using the effective interest rate method. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the interest rate used to discount the future cash flows for the purpose of measuring the impairment loss. 3.2 Fee and Commission Income and Expenses The Bank earns/pays fees and commissions from rendering and using the banking services. Fees and commissions are generally recognized on an accrual basis when a service has been provided, i.e. rendered. Fee income from loans and guarantees, which refer to a longer period, are deferred over the period of loans and guarantees. 3.3 Foreign Exchange Gains/Losses Transactions denominated in foreign currency are translated into Dinars at the official exchange rate determined on the Interbank Foreign Currency Market, prevailing at the transaction date. Monetary assets and liabilities denominated in foreign currency are translated into Dinars at the official median exchange rate determined on the Interbank Foreign Currency Market, prevailing at the balance sheet date. Foreign exchange gains or losses arising upon the translation of assets, liabilities and transactions in foreign currency are credited or debited as appropriate, to the income statement, as foreign exchange gains or losses (Note 10). Receivables and liabilities with foreign currency clause are translated at median exchange rate prevailing at the balance sheet date. Gains or losses arising upon the translation to Dinars of financial assets and liabilities indexed with foreign currency clause are recorded in the income statement within foreign exchange gains/losses and effects of contracted foreign currency clause (Note 10). Commitments and contingencies denominated in foreign currency are translated into dinars at the official median exchange rate of the National Bank of Serbia prevailing at the balance sheet date. The official exchange rates of the National Bank of Serbia, determined on the Interbank Foreign Currency Market, used in the translation of balance sheet items denominated in foreign currencies as of 31 December 2017 and 2016 into Serbian Dinars (RSD), for the major currencies were as follows: In RSD 31 December December 2016 EUR USD CHF

16 3. Summary of Significant Accounting Policies (Continued) 3.4 Financial Instruments Recognition of Financial Instruments Financial assets and financial liabilities are recognized in the Bank s balance sheet on the date when the Bank committed to the contractual provisions for a specific financial instrument. Regular way transactions of financial assets are recognized on the settlement date Measurement of Financial Instruments All financial instruments are initially recognized at fair value, including any directly attributable incremental costs of acquisition or issue, except for financial assets and financial liabilities which are valued at fair value through profit and loss. Financial assets which are valued at fair value through profit and loss are initially recognized at fair value, and the transaction expenses are included in the operating expenses in the income statement. Transaction expenses include expenses that are directly attributable to the acquisition or issue of the financial asset or financial liability. Financial assets available for sale and financial assets at fair value through profit and loss are, after initial recognition, valued at fair value. Loans and receivables, as well as the financial instruments held to maturity are subsequently measured at amortized cost using the effective interest rate method. Financial liabilities are measured at amortized cost using the effective interest rate method, except financial liabilities at fair value through profit and loss which are valued at fair value Regular Purchases and Sales Regular way purchases and sales of financial assets and liabilities (i.e., those that involve the delivery within the time period defined by regulation or market convention) are recognized on the settlement date, with the exception of commercial and investment securities and derivative financial instruments, which are recognized on the trade date, which is the date on which the Bank commits to purchase or sell the asset. Other purchases and sales of trading securities are treated as derivatives until the settlement Recognition of Deferred Day 1 Profit or Loss When determining the fair value by using valuation models for which not all inputs are market observable prices or rates, the Bank initially recognizes a financial instrument at the acquisition price, representing the best indicator of fair value, although the value obtained from the relevant valuation model may differ. Such difference between the acquisition price and the model value is commonly referred to as Day 1 profit. The Bank does not immediately recognize that initial difference in the income statement. Deferred Day 1 profit is amortized over the life of the instrument. Any unrecognized Day 1 profit or loss is immediately released to the income statement if the fair value of the financial instrument in question can be determined either by using market observable acquisition model inputs or by reference to a quoted price for the same product in an active market or upon settlement. After entering into a transaction, the Bank measures the financial instrument at fair value, adjusted for the deferred Day 1 profit or loss. Subsequent changes in fair value are recognised immediately in the income statement without reversal of deferred Day 1 profits and losses Classification of Financial Instruments The Bank s management determines the classification of its investments at initial recognition. Classification of financial instruments upon initial recognition depends on the purposes for which financial instruments have been obtained and their characteristics. 14

17 3. Summary of Significant Accounting Policies (Continued) 3.4 Financial Instruments (Continued) Classification of Financial Instruments (Continued) The Bank classifies its financial assets in the following categories: Loans and receivables, Financial assets at fair value through profit or loss, Securities held-to-maturity securities and Securities available-for-sale. Subsequent measurement of financial assets depends on their classification as follows: Loans and Receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables from banks and customers are recognized in the balance sheet at the moment when cash is advanced to borrowers. All loans and receivables are initially recognized at fair value including directly attributable origination costs that are regarded as an adjustment to the effective interest rate of the loan and subsequently measured at amortised cost using effective interest rate method (Note 3.1). At the reporting date, loans and advances originated by the Bank are stated at the outstanding amount of principal, less allowance for impairment, which is based on the estimation of identified risk for the specific exposures, as well as the risk that is inherent in the Bank s loan portfolio. Loans in Dinars, with a contracted foreign currency clause, i.e., Dinar - EUR or Dinar - CHF foreign exchange rate, are revalued in accordance with the median rate at the reporting date. The difference between the outstanding amount of a loan and the amount calculated applying the foreign currency clause is disclosed within loans and receivables. Gains and losses resulting from the application of the foreign currency clause are recorded in the income statement, within foreign exchange gains/losses and effects of contracted foreign currency clause. Rescheduled Loans Where possible, the Bank seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment period as well as changes in the loan conditions. Once the terms have been renegotiated, the loan is no longer considered past due. The management continuously monitors renegotiated loans to ensure that all criteria are met and that future payments are likely to occur Financial Assets at Fair Value through Profit or Loss Securities and other placements held at fair value through profit and loss include trading securities that have been primarily acquired for generating profit from short-term price fluctuations. Trading securities are stated in the balance sheet at fair value. Changes in fair value of trading securities and other placements held at fair value through profit and loss are recognized in the income statement, as gains/losses from financial assets held for trading. 15

18 3. Summary of Significant Accounting Policies (Continued) 3.4 Financial Instruments (Continued) Classification of Financial Instruments (Continued) Securities Held-to-Maturity Held-to-maturity securities are financial assets with fixed or determinable payments and fixed maturities that the Bank s management has the positive intention and ability to hold to maturity. Securities held-to-maturity include discounted bills of exchange initially recorded at cost.after the initial recognition, securities held-tomaturity are subsequently measured at amortized cost using the effective interest rate method,. Amortized cost is calculated by taking into account any discounts or premiums on acquisition, over the period to maturity less any allowance for impairment. In accordance with the provisioning policy the Bank performs individual assessment for the materially significant held to maturity securities for which impairment trigger exist in order to determine whether there is objective evidence on impairment of securities held-to-maturity. If there is objective evidence that such securities have been impaired, the amount of impairment loss for investments held to maturity is calculated as the difference between the investments carrying amount and the present value of expected future cash flows discounted at the investment's original effective interest rate, and it is charged to the income statement (Note 12). For other held-to-maturity securities, the Bank performs collective assessment for impairment. If, in the subsequent year, the amount of the estimated impairment loss decreases as a consequence of an event occurring after the impairment was recognized, the previously recognized impairment loss is reduced and effects are credited to the income statement Securities Available-for-Sale Securities intended to be held for an indefinite 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 securities include other legal entities equity instruments and debt securities. Equity investments comprise equity investments in other legal entities, related parties, shares of companies and banks denominated in Dinars and foreign currencies. Subsequent to the initial measurement, the securities available-for-sale for which there is an active market are measured at fair value. The fair values of securities quoted in active markets are based on current bid prices. Changes in fair value of securities available-for-sale are recognized directly in equity within the available-for-sale revaluation reserves. When the available-for-sale security is disposed of or impaired, the cumulative gain or loss previously recognized in equity is recognized in the income statement. Equity instruments in other legal entities that do not have a quoted market price in an active market and for which other methods of reasonably estimating fair value are inappropriate are exempt from fair value valuation. Such available-for-sale securities are measured at cost, less any allowance for impairment. Dividends earned whilst holding available-for-sale financial instruments are recognized in the income statement as dividend income when the right to receive payment is established. Gains and losses arising from the sale of these securities are credited or debited as appropriate, to the income statement, as gains/losses from sale of available-for-sale securities Issued Financial Instruments and Other Financial Liabilities Issued financial instruments and other financial liabilities are initially recognized at fair value net of transaction costs incurred. Subsequent measurement is at amortized cost (unless they are designated as at fair value through profit or loss) and any difference between net proceeds and the redemption value is recognized in the income statement over the period of the borrowing using the effective interest rate method. Deposits from other banks and customers and interest-bearing financial liabilities are initially recognized at the fair value of the consideration received, net of transaction costs except for financial liabilities through profit and loss. Subsequent to the initial recognition, interest-bearing deposits and borrowings are measured at amortized cost. 16

19 3. Summary of Significant Accounting Policies (Continued) 3.4 Financial Instruments (Continued) Classification of Financial Instruments (Continued) Issued Financial Instruments and Other Financial Liabilities (Continued) Borrowings are recognized initially at fair value net of transaction costs incurred. Borrowings are subsequently stated at amortized cost. Borrowings are classified as current liabilities, unless the Bank has the indisputable right to settle the obligations for at least 12 months after the balance sheet date. Trade payables and other current liabilities are measured at amortized value, which approximates their nominal value due to the short-term nature of these liabiltities Financial Derivatives The Bank uses financial instruments such as currency forward contracts, currency swap and interest swap contracts for hedging and trading purposes. The Bank has chosen to apply trade date accounting for these transactions. Upon closing forward contracts, the Bank records spot transactions from the contract when they have occurred, recognizing concurrently financial assets and liabilities arising from forward transactions which will be realized in the following period. On daily basis, the Bank measures unrealized forward transactions of forward contracts by crediting/debiting them to accrual accounts and the income statement. During 2017 and 2016, the most common financial derivatives in the Bank were currency swaps used to balance short-term gaps in the Bank s currency positions and to provide the necessary currency structure on the accounts held abroad Reclassification of Financial Assets IAS 39 Financial Instruments: Recognition and Measurement prescribes conditions for the reclassifications of financial assets. Financial assets are reclassified from one category to another in accordance with whether they fulfil criteria to be transferred to another category and intention of management related to the specific financial asset. Financial assets other than loans and receivables can be reclassified out of the trading category at fair value through profit and loss only in rare circumstances. Reclassification of a financial asset is carried at fair value at the reclassification date. Fair value of a financial asset at the reclassification date becomes the new cost or amortized cost, as applicable, and no reversal of fair value gains or losses recorded before reclassification date is subsequently made Fair Value of Financial Instruments The fair value of financial instruments traded in active markets as of the balance sheet date is based on their quoted market prices of supplies and demand, without any deductions for transaction costs. For all other financial instruments not listed in an active market, the fair value is determined using the appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist and other relevant valuation models. When market inputs are not available, they are determined by estimates that include a certain degree of assumptions in the estimate of fair value. Valuation models reflect the current market conditions at the measurement date and they do not have to represent market conditions before and after the date of measurement. Consequently, all valuation techniques are revised periodically, in order to appropriately reflect the current market conditions. 17

20 3. Summary of Significant Accounting Policies (Continued) 3.4 Financial Instruments (Continued) Impairment of Financial Assets and Provision for Risks In accordance with its internal policy, the Bank assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (an incurred loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulties, defaults or delinquencies in interest or principal payments, the probability that they will enter into bankruptcy or other financial reorganization, and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. The Bank assesses whether objective evidence of impairment exists for all exposures that are individually significant and for which impairment trigger exist. If there is objective evidence that a financial asset has been impaired, the amount of loss is measured as the difference between the carrying amount and the present value of the future cash flows as discounted using the: (a) loan s original effective interest rate if the loan bears the fixed interest rate, or (b) current effective interest rate, if the loan bears the variable rate. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure. If a loan or an investment held-to-maturity has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate provided for under the contract. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics and the Bank s internal grading system by an asset type, delinquency in servicing interest or principal, collateral existance, rating, currency, segment and other relevant factors. Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the years on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist at the balance sheet date. The Bank regularly reviews the methodology and assumptions used for estimating future cash flows in order to reduce any differences between loss estimates and actual loss experience. The carrying amount of the loan is reduced through the use of an allowance account, and the amount of the impairment loss arising from impairment of loans and receivables, as well as other financial assets measured at amortized cost, is recognized in the income statement as impairment losses on financial assets (Note 12). Once a financial asset or a group of similar financial assets has been recorded as a result of an impairment loss, interest income is thereafter recognised in the income statement on the net exposure using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss (unwinding). Loans together with the associated allowance for impairment are written off when there is no realistic prospect of future recovery and when collateral has been realized or has been transferred to the Bank. Financial assets can be written off for accounting purposes by transferring them to off balance evidence or completely removed from the books. Bank continues all actions for collection of debt after transferring financial assets to off balance. If, in the subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognized in the income statement (Note 12). The Bank has established the Write off Committee responsible for writing off of uncollectible loans and receivables. Writing off of uncollectible debts is in accordance with the Bank s internal policy. 18

21 3. Summary of Significant Accounting Policies (Continued) 3.4 Financial Instruments (Continued) Reserves for Estimated Losses on Bank Balance Sheet Assets and Offbalance Sheet Items Reserves for estimated losses on balance sheet assets and off-balance sheet items are calculated in accordance with the National Bank of Serbia s Decision on the Classification of Bank Balance Sheet Assets and Off-balance Sheet Items ( RS Official Gazette, no, 94/2011, 57/2012, 123/2012, 43/2013, 113/2013, 135/2014, 25/2015, 38/2015, 61/2016, 69/2016, 91/2016, 101/2017 and 114/2017). Total receivables from one debtor (balance sheet assets and off-balance sheet items) are classified into categories from A to E based on prescribed criteria for the assessment of receivables collectability degree. The collectability of receivables from one debtor is assessed based on the debtor s regular performance of obligations, financial position and quality of obtained collateral. The degree of documented applied criteria, i.e. completeness of a debtor s credit file also affects the determination of the classification category. Based on the classification of receivables, and pursuant to the stated Decision of the National Bank of Serbia, the reserve amount for estimated losses is calculated by applying the following percentages: 0% for placements classified into category A and B, with the exception for placements classified into category B on the basis of contracts concluded until 30 September 2016, provided that it is not refinancing or restructuring lending, for which percenting of 2% applied, than 15% for placements classified into category C, 30% for placements classified into category D and 100% for placements of category E. Through its internal enactments, the Bank specified in more detail the criteria and methodology for determining a debtor s classification category, depending on the type of debtor (legal entity, entrepreneur, natural person, categories of receivables for the purpose of additional monitoring of asset quality etc.) as well as the procedures of regular updating of credit files. The Bank determines the required reserve for estimated losses of each borrower as the sum of positive differences between the estimated loss reserve calculated in accordance with the above mentioned decision of the National Bank of Serbia and the established amount of allowances for impairment of balance sheet assets and provision for off-balance sheet items, which are, in accordance with the Bank s accounting policy disclosed in Note 3.4.8, charged to the income statement (Note 12). As of 31 st December 2017, the Bank has decreased amount of required reserves for estimated losses up to zero based on decrease of NPL below 10%, in line with Decision of National Bank of Serbia,so required reserve for estimated losses on balance sheet assets and off-balance sheet items is not included as deductible item from the Bank s capital in accordance with the National Bank of Serbia s decision governing banks capital adequacy Derecognition of Financial Assets and Financial Liabilities Financial assets cease to be recognized when the Bank loses control of the contractual rights governing such instrument, which occurs when the rights of use of such instruments have been realized, expired, abandoned, and/or ceded. When the Bank has transferred its rights to receive cash flows from an asset or has entered into a passthrough arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Bank s continuing involvement in the asset. Continuing involvement of the Bank 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 Bank could be required to repay. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expired. 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 recognized in the income statement. 19

22 3. Summary of Significant Accounting Policies (Continued) 3.4 Financial Instruments (Continued) Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount reported in the balance sheet if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously National Bank of Serbia Decision on the accounting write-off National Bank of Serbia reached in the year 2017 Decision on the accounting write-off of bank balance sheet assets. Decision came into force on 19 th August 2017 with implementation as of 30 th September By this Decision, National Bank of Serbia prescribed cases in which commercial banks are obliged to perform accounting write-off of balance sheet assets of a low degree of collectability. Decision relates to non-performing loans in accordance with classification of bank balance sheet assets and off-balance sheet items for which bank calculated impairment equals to 100% of its gross book value. Accounting write-off means the transfer of a bank s balance sheet assets to off-balance sheet records, while legally bank has rights to further continues with collection event through court cases. Total amount of accounting written-off balance sheet assets of low degree of collectability transferred to off-balance evidence as of December 31 st, 2017 is disclosed in Note 40(g). 3.5 Cash and Cash Equivalents For the purposes of the Statement of cash flows, cash and cash equivalents include cash, balances on current accounts held with other banks, gyro account balances and other cash equivalents (Note 20). 3.6 Repurchase Agreements ( Repo Transactions ) Securities bought under agreements to repurchase at a specified future date ( repos ) are recognized in the balance sheet. The corresponding cash given, including accrued interest is recognized in the balance sheet. The difference between the sale and repurchase prices is treated as interest income and is accrued over the life of the agreement. Securities purchased from the National Bank of Serbia under agreements to resell, pursuant to the provisions of the General Agreement on the Sale of Securities with an obligation to repurchase, are stated at amortized cost at the balance sheet date. 3.7 Investments in Subsidiaries Subsidiary is a legal entity in which the reporting entity possesses a stake of more than 50 percent, or otherwise holds more than half of voting rights, or the right to manage the financial (business) policy of the subsidiary. Equity investments in subsidiaries are stated at cost less allowance for impairment. As of 31 December 2017, the Bank does not have investments in subsidiaries. 3.8 Property, Plant and Equipment Property, plant and equipment mostly consist of buildings, equipment and leasehold improvements. Property, plant and equipment are initially recognized at cost, which includes all costs that are required to bring an asset into operating condition. Subsequent to initial recognition, property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses (Note 27). 20

23 3. Summary of Significant Accounting Policies (Continued) 3.8 Property, Plant and Equipment (Continued) Costs incurred subsequent to the acquisition of an asset which is classified as property and equipment are capitalised only when it is probable that they will result in future economic benefits to the Bank beyond those originally anticipated for the asset, otherwise they are expensed as incurred. Depreciation of an asset begins when it is available for use and ceases only when the asset is derecognised. Depreciation and amortization are provided on a straight-line basis in order to fully write off the cost/revaluated amount of the assets over their estimated useful lives: Land Buildings own used Buildings (investment property) Leasehold improvements Furniture and other relevant equipment Vehicles Hardware and other equipment No depreciation Not exceeding 50 years Not exceeding 50 years Residual lease term, not exceeding 5 years Not exceeding 12 years Not exceeding 12 years Not exceeding 5 years The impairment test of the property is carried on a semi-annual basis in order to determine whether there are indications which suggest that there is no impairment loss of property. Where there is an indication of impairment, the asset must be tested for impairment by calculating its recoverable amount and comparing this to its carrying value. Where there is partial impairment of an asset such that it still has some value to the Bank, an impairment test is carried out by comparing the recoverable amount of the asset to its carrying amount. The recoverable amount is the higher of the asset s value in use and its fair value less costs to sell. An impairment loss is recognized as an expense in the amount of the difference, as required by IAS 36 "Impairment of Assets". Gains from the disposal or sale of property and equipment are credited directly to other operating income, whereas any losses arising on the disposal of property and equipment are charged to other expenses. The calculation of the depreciation and amortization for tax purposes is determined by the Law on Corporate Income Tax of the Republic of Serbia ( RS Official Gazette no. 25/2001, 80/2002, 43/2003, 84/2004 and 18/2010,101/2011 and 119/2012, 47/2013, 108/2013, 68/2014,142/2014, 91/2015,112/2015 and 113/2017) and the Rules on the Manner of Fixed Assets Classification in Groups and Depreciation for Tax Purposes ( RS Official Gazette, no. 116/2004 and 99/2010). Different depreciation methods used for the financial reporting purposes and the tax purposes give raise to deferred taxes (Note 17). 3.9 Intangible Assets Intangible assets are non-monetary assets without physical substance from which an inflow of future economic benefits to the entity is expected. The main conditions for the asset to be identified as an intangible asset are: identifiable; existence of the control; and existence of the future economic benefits. If the item does not fulfil the requirements set out in the definition of intangible assets, expenses of its acquisition or internal generation are recognized as an expense when incurred. Intangible assets consist of licenses, software and similar rights as well as other intangible assets. Intangible assets are initially recorded at cost less accumulated amortization and accumulated impairment losses, if any (Note 26). 21

24 3. Summary of Significant Accounting Policies (Continued) 3.9 Intangible Assets (Continued) The cost of purchased intangible asset includes: cost (including import duties and non-recoverable taxes, after deducting trade discounts and rebates); and all directly attributable costs which are incurred to prepare the asset for its intended use (costs of employee benefits; professional fees and costs arising directly from testing its operating condition) Costs associated with developing and maintaining computer software programs are recognized as an expense as incurred. The following represent examples of costs that do not meet criteria to be recognized as intangible asset: expenditure on training staff to operate the asset initial operating costs and maintenance costs reorganizational costs internally generated brands, and controlling and advertising costs. The testing of intangible assets on impairment is performed by comparing the amount of assets that can be recovered to the carrying amount of the assets, as follows: on the annual basis, and whenever there is an indication that an intangible asset may be decreased. The impairment test for intangible assets (both with definite and indefinite useful life) requires that the Bank assesses the asset s recoverable value that is higher than its fair value decreased by costs for sale and its value in use. The asset is not impaired if one of these two values is higher than its carrying amount. IAS 36 Impairment of Assets, measures impairment loss based on an assumption that the Bank will choose to recover the carrying amount in the most beneficial way. In case an asset s recoverable value is lower than its carrying amount, the asset s carrying amount is decreased to its recoverable amount. This decrease represents the impairment loss which should be immediately recognised in the income statement. If it is not possible to estimate the recoverable amount of an individual asset the Bank shall determine the recoverable amount of the cash-generating unit to which the asset belongs. In case of newly recognised intangible asset, an impairment test must be carried out before the end of the current annual period. An impairment loss of an asset recognised in previous years should be reversed if and only if a change has occurred in assessments used for determining the recoverable amount of this asset, after the impairment loss was recognised for the last time. This increase means reversal of the impairment loss and is immediately recognised in the Income Statement Investment Property The Bank owns property as investments with intention to generate profits from rents and/or increases in property value on the market. Subsequent to initial recognition, investment property is stated at cost less accumulated depreciation and any accumulated impairment loss (Note 28). Depreciation of investment property is calculated using the straight-line method in order to fully write off the cost of these assets over their estimated useful lives, by applying the annual depreciation rate of 2%. The impairment test for investment properties is performed on the semi-annual basis in order to assess whether there are any indications of the impairment of investment property. 22

25 3. Summary of Significant Accounting Policies (Continued) 3.11 Assets Held-for-Sale A non-current asset is classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use for the purpose of performing the activities. Non-current assets held for sale are measured at the lower of carrying amount and fair value less costs to sell and shall not be depreciated (Note 29). In order for property to be reclassified to asset held for sale, it is necessary that non-current asset must be available for immediate sale in its present condition and that the recoverability of the carrying amount through sale transaction must meet the following criteria: the appropriate level of management must be committed to a plan to sell the asset; an active program to locate a buyer and to complete the sales plan must have been initiated; the asset must be actively marketed for sale at a price that is reasonable in relation to its current fair value; the sale should be expected to be completed within 12 months from the date of classification as held for sale ; and actions required to complete the sales plan should indicate that it is unlikely that significant changes to the sales plan will be made or that the plan will be withdrawn. In case where there are no more prescribed criteria and it has been more than 12 months since asset is reclassified, the legal entity should stop to classify the asset to held for sale and perform reclassification to: investment assets if property is leased or on assets to where it was before reclassification on asset held for sale Assets recorded on asset held for sale are stated at net book value. During reclassification is necessary to calculate amount of depreciation for the period that the asset is not amortized and post this depreciation When a non-current asset ceases to be classified as held for sale, it is measured at the lower of: its carrying amount before the asset was classified as held for sale, adjusted for any depreciation, amortisation or revaluations that would have been recognised had the asset not been classified as held for sale; and its recoverable amount at the date of a subsequent decision not to be sold. Recoverable amount is the higher of the fair value less costs to sell and the value in use, where the value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. During 2017 the Bank had in the books land held for sale which is sold in Currently, Bank doesn t have assets held for sale Foreclosed Assets The property (land and buildings) which is repossessed following the foreclosure on loans that are impaired is reported within Other assets (Note 30). Assets acquired through foreclosure temporarily held for liquidation are stated at the lower of the carrying amount and the fair value less costs to sell. If the property foreclosure asset is not sell in the period of 5 (five) years from the acquisition, 90% impairments Bank books, no matter of the valuation of external appraisers. If the other equipment foreclosure asset is not sell in the period of 3 (three) years from the acquisition, Bank books 100% impairments. 23

26 3. Summary of Significant Accounting Policies (Continued) 3.13 Leases Lease is defined as an agreement whereby the lessor transfers the right to use the asset for an agreed period of time to the lessee, in exchange for a payment or series of payments. There are two main types of lease: (a) Finance Lease Bank as a Lessee Finance leases, which transfer substantially all the risks and benefits incidental to ownership of the leased item to the Bank, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments, and are included in property and equipment, with the corresponding liability to the lessor included in other liabilities. Capitalized leased assets are depreciated over the shorter of the estimated useful life of the assets and the lease term, if there is no reasonable certainty that the Bank will obtain ownership by the end of the lease term. Initial direct costs of the lessee (transport costs, approval requirements, installation costs, costs of legal assistance and consultation, etc.) are added to the amount recognised as an asset. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income statement in interest expense. (b) Operating Lease Bank as a Lessee Operating lease has the characteristics of a classic rent in which the contract does not transfer all the risks and rewards incidental to ownership of the object of the lease, but the lessor retains the right of ownership, i.e. remains the owner of the lease also after the contract expires. The total payments made under operating leases are charged to other expenses in the income statement on a straight-line basis over the period of the lease Provisions and Contingencies Provisions are recognized when the Bank has a present obligation (legal or constructive) as a result of a past event, and it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be determined (Note 34). In order to be maintained, the best possible estimates of provisions are considered, determined and, if necessary, adjusted at each balance sheet date. When the outflow of the economic benefits is no longer probable in order to settle legal or constructive liabilities, provisions are derecognised in income. Provisions are taken into account in accordance with their type and they can be used only for the expenses they were recognized initially for. Provisions are not recognized for future operating losses. Contingent liabilities are not recognized in the financial statements. They are disclosed in the financial statements (Note 41), unless the possibility of an outflow of resources embodying economic benefits is small. Contingent assets are not recognized in the financial statements. They are disclosed in financial statements when an inflow of economic benefits is probable. 24

27 3. Summary of Significant Accounting Policies (Continued) 3.15 Equity Equity consists of share capital (ordinary shares), share premium, reserve from profit, revaluation reserves and unallocated losses for the current year and profit from the previous periods (Note 36). Gains and losses arising from fair value adjustments of securities available-for-sale, as well as actuarial gains/losses are recorded within revaluation reserves (Note 37) Financial Guarantees In the ordinary course of business, the Bank gives financial guarantees, consisting of payment guarantees and performance bonds, letters of credit, acceptances and other warranties. Financial guarantees are contracts which obligate the issuer of a guarantee to perform the payment or compensate the loss to the holder of a guarantee, incurred if a certain creditor fails to settle its liabilities in due time as required under the terms of the contract. Financial guarantees are initially recognized in the financial statements at fair value as of the date the guarantee is given. Subsequent to initial recognition, the Bank s liability under each guarantee is measured at the higher of the amortized premium and the best estimate of expenditure required for settling any financial obligations arising as a result of the guarantee. Any increase in the liability relating to the financial guarantees is recognized in the income statement. The premium received is recognized in the income statement within net fees and commissions income on a straight-line basis over the life of the guarantee Funds Managed on Behalf of Third Parties The funds that the Bank manages on behalf of, and for the account of third parties, are disclosed within offbalance sheet items (Note 40). The Bank bears no risk in respect of repayment of these placements Employee Benefits (а) Employee Taxes and Contributions for Social Security In accordance with the regulations prevailing in the Republic of Serbia, the Bank has an obligation to pay tax and contributions to various state social security funds and by these means it provides social security to employees. These obligations involve the payment of contributions on behalf of the employee and by the employer in amounts calculated by applying the specific, legally-prescribed rates. The Bank is also legally obligated to withhold contributions from gross salaries to employees, and on their behalf to transfer the withheld portions directly to the appropriate government funds. These taxes and contributions payable on behalf of the employee and employer are charged to expenses in the period in which they arise. (b) Retirement Benefits In accordance with Labour Law, Bank has obligation to pay retirement benefits to employees at least in the amount of two average gross salaries in the Republic of Serbia according to the latest published data of the authority responsible for statistics. The Bank s Collective Agreement prescribes payment of retirement benefit to employee in case of retirement or termination of employment by force due to loss of working capability in the amount of three salaries that employee would gain for the month that is prior to month in which severance is paid. Severance payment calculated in that way cannot be lower than three average monthly salaries per employee paid by employer for the month prior to month in which severance is paid, i.e. three average salaries per employee paid in Republic of Serbia in accordance with latest announcement of relevant organization if this is more favourable for employee. Bank performs severance payment to employees in accordance with the Collective Agreement. The Bank recognizes long-term provisions for retirement benefits based on actuarial calculation in the amount of present value of expected future payments. Provisions for retirement are closed at the moment of severance payment to individual employee and difference is booked as severance expense. Cost of services is recognized in the income statement when incurred, while the actuarial gains and losses are recognized in the statement of other comprehensive income. 25

28 3. Summary of Significant Accounting Policies (Continued) 3.18 Employee Benefits (Continued) (b) Retirement Benefits (Continued) At the balance sheet date, the Bank has made provisions for severance payments for retirement (adjusted by the amount of severance paid to employees who are on the program of restructuring early retirement) using the following assumptions: Discount rate 6.25% 7,20% - Inflation rate 2.50% 4.00% - Average earnings growth 3.50% 5.50% (c) Short-term Compensated Absences Accumulating compensated absences may be carried forward and used in future periods if the current period s entitlement has not been fully used. In the instance of non-accumulating compensated absences, no liability or expense is recognized until the time of the absence. There are two types of compensated absences: cumulative absences that could be carry forward and used in future periods (for example: annual leave and sick leave); and non-cumulative absences that expire if they are not used in total (for example: right to maternity leave). Employees usually earn cumulative absences when they work while non-cumulative absences are not workrelated. Expected expenses for compensated absences are recognized as following: cumulative compensated absences are recognized when employees work, i.e. provide services that increase their right on future paid absences; and non-cumulative absences are recognized at the moment when they are realized. (d) Defined Benefit Plan A defined benefit plan is a post-employment benefit plan that defines an amount of benefit to be provided, determined using a number of financial and demographic assumptions. The most significant assumptions include age, years of service or compensation, life expectancy, the discount rate, expected salary increases and pension rates. For defined benefit plans, the liability is the present value of the defined benefit obligation as at the reporting date. The defined benefit obligation and the related costs are calculated by independent actuaries on an annual basis at the end of each annual reporting period. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows in the currency in which the benefits will be paid. Net interest is calculated by applying the discount rate at the beginning of the period to the net defined liability/(asset). Service cost (current service cost, past service cost, including the effect of curtailments and gains or losses on settlements) and net interest on the net defined benefit liability/(asset) are charged to the income statement and are included in staff costs. The defined benefit obligation is recorded in the balance sheet, with changes resulting from remeasurement (comprising actuarial gains and losses) recognized immediately in other comprehensive income. (e) Pension Funds The Bank does not have own Pension Funds or share-based remuneration options, and therefore there are no recognized liabilities with respect to these benefits as of 31 December

29 3. Summary of Significant Accounting Policies (Continued) 3.19 Taxes and contributions Income Taxes (a) Current Income Tax Current income tax is calculated and paid in accordance with the effective Corporate Income Tax Law of the Republic of Serbia ( RS Official Gazette, no. 25/2001, 80/2002, 43/2003, 84/2004, 18/2010, 101/2011, 119/2012, 47/2013, 108/2013, 68/2014, 142/2014, 91/2015, 112/2015 and 113/2017) and relevant by-laws. Income tax is calculated at the rate of 15% (applicable for 2016 and 2017) on the tax base reported in the annual corporate income tax return, and can be reduced by any applicable tax credits. Calculation of the tax base includes a result from the income statement that is adjusted in accordance with the Republic of Serbia s tax regulations. Pursuant to the Law on Amendments and Supplements to the Corporate Income Tax Law ( RS Official Gazette, no. 108/2013), starting from determining the income tax for 2014, the tax payers are no longer able to use the tax incentive in the form of a tax credit for investment in fixed assets. A taxpayer that had qualified for the right to a tax incentive - tax credit by 31 December 2013 and presented details in the tax return for 2013 is entitled to use that right until the expiry of the deadline prescribed by law (not more than ten years). The tax regulations in the Republic of Serbia do not provide for the possibility that any tax losses of the current period are used to recover taxes paid within a specific previous period. Losses recognized in the tax return in the current accounting period may be transferred to the account of profit determined in the annual tax return from the future accounting periods, but not longer than five ensuing years. (b) Deferred Taxes Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The currentlyenacted tax rates or the substantively-enacted rates at the balance sheet date are used to determine the deferred income tax amount. For calculation of deferred taxes the rate of 15% was used. Deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised for all deductible temporary differences, carry forwards of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available, against which the deductible temporary differences, as well as unused tax credits and unused tax losses carried forward can be utilised. The carrying amount of deferred tax assets is reviewed at each reporting 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 tax assets to be utilised. Current and deferred taxes are recognized as income or expense and are included in net profit for the period. Deferred income taxes related to items that are recorded directly in equity are also recognized in equity Taxes and Contribution not related to Operating Result Taxes and contributions that are not related to operating result include property tax, employer contributions on salaries, and various other taxes and contributions paid pursuant to republic, local and municipal regulations. These taxes and contributions are included in other expenses (Note 15) Earnings per Share The Bank discloses basic earnings per share. Basic earnings per share is calculated by dividing net profit attributable to ordinary equity holders of the Bank by the weighted average number of ordinary shares outstanding during the reporting period. 27

30 3. Summary of Significant Accounting Policies (Continued) 3.21 Related Parties Transactions Related parties of the Bank include members of the Group the Bank belongs to (OTP Group) and entities in which the Bank has the controlling and significant investment. Parties related with the Bank are persons who can have a significant influence on the Bank s financial and business decisions. Parties related with the Bank include members of the management bodies, the Board of Directors and the Executive Board of the Bank, their close relatives and companies they own or control, as well as the companies on which financial and business policies they have influence Outstanding balances of receivables and liabilities at the reporting date, as well as transactions occurred with related parties during the reporting periods, are separately disclosed (Note 44). 4. Summary of Significant Accounting Estimates The preparation of the financial statements requires the Bank s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as income and expenses for the reporting period. These estimations and related assumptions are based on information available as of the date of preparation of the financial statements. Actual results could differ from those estimates. These estimates and underlying assumptions are reviewed on an ongoing basis, and changes in estimates are recognized in the periods in which they become known. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are stated in the text below. 4.1 Impairment of Financial Assets The amount of the allowance set aside for loan losses is based upon management s ongoing assessments of the probable estimated losses inherent in the loan portfolio. Assessments are conducted by members of management responsible for various types of loans employing a methodology and guidelines, which are continually monitored and improved. This methodology has two primary components: individual assessment and collective assessment and is described in Note Applying this methodology requires management to make estimates regarding the amount and timing of the cash flows, which are expected to be received. In estimating these cash flows, management makes judgments about the counterparty s financial situation and the net realizable value of any underlying collateral or guarantees in favour of the Bank. Each impaired asset is assessed on its merits, and the workout strategy and estimate of cash flows considered recoverable are independently reviewed. In assessing the need for collective loan loss allowances, management considers factors such as credit quality, portfolio size, concentrations, and economic factors. In order to estimate the required allowance, assumptions are made both to define the way inherent losses are modelled and to determine the required input parameters, based on historical experience and current economic conditions. The accuracy of the allowances and provisions depends on the model assumptions and parameters used in determining collective allowances. While this necessarily involves judgment, Management believes that the allowances for loan losses and provisions are reasonable and supportable. 4.2 Fair Value of Financial Instruments The fair values of financial instruments that are not quoted in active markets are determined by using valuation techniques. These include present value methods and other models based mainly on observable input parameters and to a small extent to non-observable input parameters. 28

31 4. Summary of Significant Accounting Estimates (Continued) 4.2 Fair Value of Financial Instruments (Continued) Valuation models are used primarily to value derivatives transacted in the over-the-counter market and certain government bonds and debt securities that are not traded in an active market. These models take into consideration the impact of credit risk if material. All valuation models are validated before they are used as a basis for financial reporting, and periodically reviewed thereafter, by qualified personnel independent of the area that created the model. Wherever possible, the Bank compares valuations derived from models with quoted prices of similar financial instruments and with actual values when realised, in order to further validate and calibrate its models. A variety of factors are incorporated into the Bank s models, including actual or estimated market prices and rates, such as time value and volatility, market depth and liquidity, and changes in own credit risk for financial liabilities. The Bank applies its models consistently from one period to the next, ensuring comparability and continuity of valuations over time, but estimating fair value inherently involves a significant degree of judgment. Management therefore establishes valuation adjustments to cover the risks associated with the estimation of unobservable input parameters and the assumptions within the models themselves. Although a significant degree of judgment is, in some cases, required in establishing fair values, management believes the fair values recorded in the statement of financial position and the changes in fair values recorded in the income statement are prudent and reflective of the underlying economics, based on the controls and procedural safeguards employed. 4.3 Impairment of Investment Securities The Bank follows IAS 39 guidance in order to determine whether the investment securities are impaired. Identifying potential impairment for equity securities requires significant judgement. For investments in equity instruments, the Bank evaluates, among other factors, whether there has been a significant or prolonged decline in the fair value below its cost. This evaluation of what is significant or prolonged decline requires management judgment. In making this judgment, the Bank considers among other factors, the severity and duration of the unrealized losses, the normal volatility in share price and the financial health of and near-term business outlook for the investee, including factors such as industry and sector performance, changes in technology and operational and financial cash flows. For investments in debt instruments, the Bank assesses whether the issuer is expected to meet all payment obligations when due. This assessment takes into consideration the financial condition and prospects of the issuer. 4.4 Useful life of Property, Plant, Equipment and Intangible Assets The determination of the useful life of property, plant, equipment and intangible assets is based on historical experience with similar assets as well as any anticipated technological development and changes in broad economic or industry factors (Notes 3.8 and 3.9). The appropriateness of the estimated useful lives is reviewed annually, or whenever there is an indication of significant changes in the underlying assumptions. 4.5 Impairment of Non-financial Assets At each balance sheet date, the Bank s management reviews the carrying amounts of the Bank s fixed assets, intangible assets, investment property, foreclosed assets and current assets held for sale presented in the financial statements. If there is any indication that such assets have been impaired, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. If the recoverable amount of an asset is estimated to be lower than its carrying value, the carrying amount of the asset is reduced to its recoverable amount. An impairment review requires management to make subjective judgments concerning the cash flows, growth rates and discount rates of the cash generating units under review. 29

32 4. Summary of Significant Accounting Estimates (Continued) 4.6 Retirement and Other Post Employment Benefits to Employees The costs of defined employee benefits payable upon the termination of employment, i.e. retirement in accordance with the legal requirements are determined based on the actuarial valuation. The actuarial valuation includes an assessment of the discount rate, future movements in salaries, mortality rates and fluctuations in the number of employees. As these plans are long-term ones, significant uncertainties influence the outcome of the assessment. Actuarial assumptions are disclosed in Note 3.18(b) to the financial statements. 4.7 Provisions for Litigations The Bank is subject to a number of claims incidental to the normal conduct of its business, relating to and including commercial, contractual and employment matters, which are handled and defended in the ordinary course of business. The Bank routinely assesses the likelihood of any adverse judgements or outcomes to these matters as well as ranges of probable or reasonable estimated losses. Reasonable estimates involve judgement made by the Bank s management after considering information including notifications, settlements, estimates performed by legal department, available facts, identification of other potentially responsible parties and their ability to contribute to resolution, and prior experience. A provision for litigations is recognised when it is probable that an obligation exists for which a reliable estimate can be made after careful analysis of the individual matter. The required provision may change in the future due to new developments and as additional information becomes available. The Bank quarterly reassesses the estimated provision for litigation. Matters that are either possible obligations or do not meet the recognition criteria for a provision are disclosed, unless the possibility of transferring economic benefits is remote. 4.8 Income Taxes Income tax is calculated in accordance with legal regulations of the Republic of Serbia. The Bank does not make provisions for income tax calculation (Note 16). Deferred tax assets are recognized for all unused tax losses and (or) tax credits to the extent to which taxable profit will be available against which the unused tax losses/credits can be utilized. Significant estimate of the management is necessary to determine the amount of deferred tax assets which can be recognized, based on the period in which it was created and the amount of future taxable profits (Note 17). 30

33 5. Interest Income and Expense (a) Interest income/( expense) per type of financial instruments In RSD thousand Interest income from: Loans 4,902,456 5,237,995 Deposits 4,739 1,519 Securities 523, ,250 Other placements 189, ,004 Total income 5,620,328 6,079,768 Interest expense from: Loans (4,366) (4,811) Deposits (812,513) (1,203,128) Other (259) (682) Total expense (817,138) (1,208,621) Net interest income 4,803,190 4,871,147 (b) Interest income/(expense) per industry In RSD thousand Interest income: Finance and insurance 206, ,365 Public companies 163, ,023 Public sector 516, ,937 Corporate 995,102 1,136,446 Entrepreneurs 76,017 79,881 Retail 3,606,138 3,705,610 Foreign persons 5,325 3,330 Private households and agricultural 7,654 8,503 Other clients 44,087 22,673 Total income 5,620,328 6,079,768 Interest expense: Finance and insurance (7,467) (39,112) Public companies (58,641) (64,149) Public sector (26,209) (58,044) Corporate (200,051) (234,986) Entrepreneurs (3,492) (5,750) Retail (276,749) (560,630) Foreign persons (15,500) (44,009) Private households and agricultural (5,894) (9,829) Other clients (223,135) (192,112) Total expense (817,138) (1,208,621) Net interest income 4,803,190 4,871,147 31

34 5. Interest Income and Expense (Continued) (c) Data on accrued interest income and interest collected The following table shows interest income and collected interest to loans and receivables from clients, banks and other financial organizations, which presents main part of exposure to credit risk: In RSD thousand Interest income Interest collected Interest income on impaired receivables Collected interest on impaired receivables Receivables from retail 3,614,257 3,738, , ,738 Housing loans 571, ,935 31,290 31,123 Consumer and cash loans 2,486,955 2,643,798 51,587 42,368 Overdraft and credit card 554, , , ,106 Other receivables 1,663 3,675 1,221 1,141 Receivables from corporate and other clients 1,296,753 1,327,586 57,971 71,173 Total receivables 4,911,010 5,066, , ,911 By category of receivables Not problematic receivables 4,460,620 4,685, from which: restructured 10,634 10, Problematic receivables 450, , , ,911 from which: restructured 72,692 56,878 40,461 38,025 Total receivables 4,911,010 5,066, , ,911 In RSD thousand Interest income Interest collected Interest income on impaired receivables Collected interest on impaired receivables Receivables from retail 3,715,830 3,527, , ,673 Housing loans 609, ,519 50,243 51,326 Consumer and cash loans 2,539,938 2,439,238 88,787 86,424 Overdraft and credit card 563, , , ,580 Other receivables 3,172 5,811 2,504 4,343 Receivables from corporate and other clients 1,511,900 1,514,726 29,801 34,067 Total receivables 5,227,730 5,041, , ,740 By category of receivables Not problematic receivables 4,868,984 4,685, , ,975 from which: restructured 44,955 50,442 2,714 7,044 Problematic receivables 358, , , ,765 from which: restructured 42,888 40,559 17,901 21,929 Total receivables 5,227,730 5,041, , ,740 32

35 6. Net Fee and Commission Income Net fee and commission income related to: In RSD thousand Loans 67,450 68,697 Deposits 697, ,414 Securities 25,136 23,302 Guarantees, letters of credit 56,665 63,587 Cards 285, ,508 Local and international payments 521, ,407 Buying and selling foreign currency Other 105,859 87,974 Total 1,759,852 1,634, Net Gains from Financial Assets Held-for-Trading In RSD thousand Net gains/losses from: Sale of financial assets held for trading - 1,255 Valuation of derivatives held for trading 7,279 20,742 Net (losses)/gains 7,279 21,997 In 2017, Bank realized gains of RSD 7.3 mil from valuation of currency swap transactions 8. Net (Losses) / Gains from Risks Protection Net (losses) / gains based on valuation of In RSD thousand loans, receivables and securities (818) 2,094 Net gains from risks protection (818) 2,094 33

36 9. Net Gains from Financial Assets Available-for-Sale Net gains from sale of: In RSD thousand Treasury bills - 5,098 State bonds 45,768 67,113 Shares/equity investments - 3,654 Net gains 45,768 75,865 During 2017, 19 transactions of Treasury bonds sale has been realized with nominal value of RSD mil and EUR 39.7 mil. 10. Net Foreign Exchange Gains and Effects of Contracted Foreign Currency Clause Net gains/(losses) from: Foreign exchange Effects of foreign currency clause Net foreign exchange gains and effects of contracted foreign currency clause In RSD thousand ,305,129 (157,220) (1,849,997) 551, , , Other Operating Income In RSD thousand Release of unused provisions for litigations (Note 34) 5,112 14,560 Rental income 36,720 32,841 Gains from the sale of property, plant and equipment and intangible assets 17,323 91,938 Liabilities waived 2,837 4,919 Income from dividends and investments ,714 Surpluses Other income 37,282 19,304 Other income from operating activities 11,786 10,038 Total 112, ,079 Other operating income includes non-banking income such as income from operational lease, insurance premium, income from release of provisions etc. During 2017 the gains from rent of property in amount of RSD 36,720 thousand present the most significant item of other operating income. 34

37 12. Net Impairment Loss on Financial assets and Provisions for Credit Risk-weighted Off-balance Sheet Items (a) (Charged)/Credited to the Income Statement In RSD thousand Net (impairment losses)/reversal: Financial assets available for sale (Note 22) ( 913) (38) Financial assets held-to-maturity (Note 23) ( 6,554) (3,737) Total net impairment losses on financial assets available-for-sale and held-to-maturity ( 7,467) (3,775) Net (impairment losses)/reversal: Loans and receivables from banks (Note 24) ( 7,100) (3,906) Loans and receivables from customers (Note 25) ( 2,218,499) (693,588) Other placement and assets ( 42,730) (19,263) Total net impairment losses on loans and receivables and other assets ( 2,268,329) (716,757) Provisions for credit risk-weighted off-balance sheet items 4,366 (14,236) Total provisions for off-balance sheet items (Note 34) 4,366 (14,236) Recovery of written-off receivables 8,277 4,188 Total recovery of written-off receivables 8,277 4,188 Net impairment losses ( 2,263,153) (730,580) (b) Reserve for Estimated Losses Based on the classification of placements determined pursuant to the regulations of the National Bank of Serbia as of 31. December 2017, the Bank has calculated required reserve for estimated losses in amount of RSD 0 using the option prescribed in the Decision on Classification of Bank Balance Sheet Assets and Off-Balance Sheet Items ( RS Official Gazette, no. 94/2011, 57/2012, 123/2012, 43/2013, 113/2013, 135/2014, 25/2015, 38/2015, 61/2016, 69/2016, 91/2016, 101/2017 and 114/2017), that required reserve for estimated losses can bi determined in amount of RSD 0 if participation of non-performing loans to nonfinancial and non-government sectors in total loans to these sectors is 10% or less. In RSD thousand Calculated reserve for estimated losses pursuant to the NBS Decision under: Balance sheet positions 8,620,158 17,646,540 Off-balance sheet positions 109, ,918 Total 8,729,866 17,812,458 Allowance for impairment and provisions calculated in accordance with internal methodology (IAS 39): Balance sheet positions ( 5,607,194) ( 11,989,815) Off-balance sheet positions ( 22,466) ( 28,250) Total ( 5,629,660) ( 12,018,065) Difference between the calculated reserve pursuant to NBS Decision and allowance for impairment pursuant to internal methodology (IAS 39) 3,100,206 5,794,393 Excess allowance for impairment and provisioning under balance sheet and off-balance sheet items pursuant to internal methodology (IAS 39) in relation to the NBS Decision 547, ,695 35

38 12. Net Impairment Loss on Financial assets and Provisions for Credit Risk-weighted Off-balance Sheet Items (b) Reserve for Estimated Losses ( Continued) In RSD thousand Decrease the amount of required reserves for potential losses using the coefficient of correction required reserves for estimated losses (3,648,126) ( 1,268,682) Total required reserve for estimated losses as of 31 December - 4,676,406 Allowances for impairment and provisions calculated in accordance with the internal methodology include only the allowance for impairment which pertains to items being classified in this overview. As of 31 December 2017, the required reserve for estimated losses which may arise under balance sheet assets and off-balance sheet items, calculated pursuant to the stated NBS Decision (Note ) amounts to RSD 0 thousand (31 December 2016: RSD thousand). As of 31 December 2017, the Bank decreased the required reserve, based on the decrease of NPL as of June 30,2016 in accordance with Decision of the National Bank of Serbia, in the amount of RSD 3,648,126 thousand. 13. Salaries, Compensations and Other Personal Expenses In RSD thousand Salaries 1,490,327 1,491,307 Compensations 238, ,158 Payroll taxes 217, ,656 Payroll contributions 429, ,021 Fees for temporary employments 2,440 1,630 Other personal expenses 19,267 66,229 Net provisions for retirement benefits and other employee benefits 2,832 10,370 Total 2,399,855 2,453,371 The average number of employees in 2017 and 2016 was 1,475 and 1485, respectively. Pension Costs Defined Benefit Plans Provisions for retirement benefits have been recognized in the Bank s financial statements on the basis of an independent actuary s report as of 31 December 2017, and are stated in the amount of present value of the estimated future payments. The assumptions used for the calculation of the present value of expected outflows аrе disclosed in Note 3.18(b). In RSD thousand Income / Service cost (14,476) 18,520 Net interest expense on the net defined benefit liability/(asset) 17,308 16,864 Losses on curtailments /settlements and other expense - 68,884 Total 2, ,268 36

39 13. Salaries, Compensations and Other Personal Expenses (Continued) Pension Costs Defined Benefit Plans (Continued) Present Value of the Liability In RSD thousand Present value of the liability 231, ,383 Total 231, ,383 Movement in the Net Liability In RSD thousand Net liability at the beginning of the period 240, ,710 Benefits paid directly (2,179) (95,486) Total expense recognised in the income statement 2, ,268 Amount recognized in OCI (9,234) (21,109) Net liability at the end of the period 231, ,383 Reconciliation of Defined Benefit Obligation In RSD thousand Defined benefit obligation at the beginning of the period 240, ,710 Income / Service cost (14,476) 18,520 Interest cost 17,308 16,864 Benefits paid directly (2,179) (95,486) Losses on curtailments / settlements - 68,884 Remeasurement - (gains)/losses: - (Gain)/loss - financial assumptions (9,234) (21,109) Defined benefit obligation at the end of the period (Note 34) 231, ,383 Cumulative Amount Recognized in Other Comprehensive Income In RSD thousand Cumulative amount recognized in OCI - income/(expense) 38,913 29,679 Deferred tax on the amount recognized in OCI (5,837) (4,452) Total 33,076 25,227 37

40 14. Amortisation and Depreciation In RSD thousand Amortisation/depreciation charge: Intangible assets (Note 26) 86,608 68,127 Property and equipment (Note 27) 247, ,844 Investment property (Note 28) 3,144 4,626 Total 336, , Other Expenses In RSD thousand Material 136, ,430 Manufacturing services 1,173, ,449 Non-material costs (without taxes and contributions) 1,222,030 1,164,339 Taxes 367, ,002 Contributions 389, ,081 Other costs 7, ,179 Provisions for litigations (Note 34) 103,097 31,868 Provisions for the coverage of liabilities (Note 34) 255,657 - Expenses from other provisions 5,657 - Losses from sale of fix and intangiable assets - 2,977 Write offs of fixed and intangiable assets 9 - Shortages and damages 3,731 1,250 Other expenses 76,158 17,391 Valuation of fixed assets, investment property and intangible assets 499,708 6,703 Total 4,240,699 3,334,669 The most significant amount of non-material costs in 2017 refer to cost of deposits' insurance in the amount of RSD 506,240 thousand (2016: RSD 496,015 thousand). 38

41 16. Income Taxes (a) Components of Income Taxes Total tax income consists of the following taxes: In RSD thousand Current income tax (1,447) (11,134) Deferred taxes: Deferred tax income 90,243 4,359 Deferred tax expenses (138,137) (35,682) Net effect of deferred taxes (losses)/ income (47,894) (31,323) Total tax (losses)/income (49,341) (42,457) (b) Numerical Reconciliation of the Tax Income/(Expense) Recognized in the Income Statement and Result for the Year Before Tax Multiplied by the Statutory Income Tax Rate In RSD thousand Profit before tax (2,058,137) 343,494 Tax calculated at rate of 15% - (51,524) Tax losses to carry forward based on profit before tax 308,720 - Tax effect of expenses adjustment in tax return (116,295) (8,308) Tax effect of transfer pricing correction (578) (295) Tax effects of income adjustment in tax return 70, ,569 Effect of temporary differences - - tax depreciation and revaluation 39,336 (12,077) Effect of temporary differences - provisions for litigations 14,698 2,596 Effect of temporary differences provisions for retirement benefits 36,210 (1,849) Effect of temporary differences - unrecognized tax losses (262,208) (74,174) Effect of temporary differences - deferred taxes - tax credit (134,850) - Effect of temporary differences - other deferred taxes (3,288) (5,260) Tax effect of capital gains (2,160) (16,619) Used tax credits for investments in property, plant and equipment 713 5,484 Total tax (losses)/ income (49,341) (42,457) 39

42 16. Income Tax (Continued) (c) Unused Tax Losses Carried Forward The following table presents the year of expiration of the Banks unused tax losses carried forward: In RSD thousand Year of expiration 31 December , , , ,747,836 Total tax losses 3,129,595 As of 31 December 2017 Bank had tax losses carried forward in the amount of RSD 3,129,595 thousand. 17. Deferred Tax Assets and Liabilities Deferred tax assets/liabilities were recognized on the following grounds: In RSD thousand Deferred tax assets Temporary differences based on unpaid taxes 195 3,442 Recognized tax credit for investment in property, plant and equipment - 134,850 Recognized tax losses from previous years 192, ,820 Temporary differences on retirement benefits 72,267 36,057 The effect of temporary differences - deferred tax provisions for litigations 35,938 21,240 Deferred tax assets on capital reserves for actuarial gains/losses Deferred tax assets on revaluation reserves related to financial assets available-for-sale - 1,080 Total 301, ,184 Deferred tax liabilities Temporary differences between net book value and tax value of properties, plant, equipment and intangible assets (42,730) (82,066) Deferred tax funds related to reserves in equity for actuarial gains/losses (5,837) (4,452) Deferred tax liabilities on revaluation reserves related to financial assets available-for-sale (34,992) (19,600) Total (83,559) (106,118) Net deferred tax assets 218, ,066 40

43 17. Deferred Tax Assets and Liabilities (Continued) Movements in net deferred tax assets during the year were as follows: In RSD thousand Balance as of 1 January 284, ,415 Temporary differences between net book value and tax value of properties, equipment and intangible assets 39,336 (12,077) Temporary differences based on unpaid taxes (3,247) 1,068 Temporary differences employee benefits unpaid in year (41) 695 Temporary differences for retirement benefits 36,210 (1,849) Recognized tax credit for investment in fixed assets (134,850) (7,023) Temporary differences-provisions for litigations 14,698 2,596 Recognized tax losses from previous years - (14,733) Deferred taxes in income statement (47,894) (31,323) Deferred taxes recorded in capital (17,857) 1,974 Net movements in deferred taxes (65,751) (29,349) Balance as of 31 December 218, , Earnings per Share In RSD thousand Share capital ordinary shares 16,337,430 16,337,430 Share nominal value Total number of shares (a) 1,633,743 1,633,743 Result for the period net profit/ (losses) (b) (2,107,478) 301,037 Earnings per share (in Dinars) (b/a)

44 19. Clasification of financial assets and financial liabilities Held for trading Available for sale Held to maturity Loans and receivables Other measured at amortized value (in thousand RSD) Total Cash and cash equivalents with the Central Bank ,416,477-21,416,477 Financial assets at fair value through the Income statement held for trading 39, ,569 Financial assets available for sale - 16,268, ,268,461 Financial assets held to maturity , ,186 Loans and receivables from banks and other financial organizations ,729,058-5,729,058 Loans and receivables from clients ,504,393-73,504,393 Other assets , ,160 Total assets as of 31. December ,569 16,268,461 59, ,166, ,533,304 Financial liabilities at fair value through the Income statement held for trading 17, ,392 Deposits and other liabilities towards banks, other financial organisations and the Central Bank ,030,108 6,030,108 Deposits and other liabilities towards other clients ,149,605 97,149,605 Other liabilities , ,272 Total liabilities as of 31. December , ,766, ,784,377 42

45 19. Clasification of financial assets and financial liabilities (Continued) Held for trading Available for sale Held to maturity Loans and receivables Other measured at amortized value (in thousand RSD) Total Cash and cash equivalents with the Central Bank ,922,329-20,922,329 Financial assets at fair value through the Income statement held for trading 36, ,958 Financial assets available for sale - 21,918, ,918,248 Financial assets held to maturity - 389, ,950 Loans and receivables from banks and other financial organizations ,577,452-6,577,452 Loans and receivables from clients ,925,874-69,925,874 Other assets , ,168 Total assets as of 31. December ,958 21,918, ,950 97,664, ,009,979 Financial liabilities at fair value through the Income statement held for trading 17, ,901 Deposits and other liabilities towards banks, other financial organisations and the Central Bank ,849,696 5,849,696 Deposits and other liabilities towards other clients ,559,912 98,559,912 Other liabilities , ,740 Total liabilities as of 31. December , ,128, ,146, Cash and Balances with Central Bank In RSD thousand Gyro account 9,079,176 6,625,099 Cash on hand 4,613,634 5,991,752 Gold and other precious metals 14,922 15,746 Total 13,707,732 12,632,597 FX obligatory reserve with National bank of Serbia 7,708,745 8,289,732 Total 7,708,745 8,289,732 Balance as of 21,416,477 20,922,329 The obligatory reserve represents the minimal reserve allocated in line with the Decision on Banks Required Reserves with the National Bank of Serbia ( RS Official Gazette, no. 3/2011, 31/2012, 57/2012, 78/2012, 87/2012, 107/2012, 62/2013, 125/2014, 135/2014, 4/2015, 78/2015 and 102/2015). The Bank calculates the required reserve against liabilities in respect of dinar and foreign currency deposits, credits and securities, as well as other liabilities, excluding dinar deposits received under transactions performed on behalf of and for the account of third parties that are not in excess of the amount of the Bank s placements made from such deposits. 43

46 \ 20. Cash and Balances with Central Bank (Continued) Notwithstanding the foregoing, the Bank does not calculate the required reserve against: - the liabilities due to the National Bank of Serbia; - liabilities due to banks allocating required reserves with the National Bank of Serbia; - subordinated liabilities recognized by the National Bank of Serbia as eligible for inclusion into the Bank s supplementary capital; - dinar liabilities in respect of funds received by banks from international financial institutions, governments and financial institutions founded by foreign states, through the intermediation of the government as the main debtor and/or owner of these funds or received directly,provided that the agreed principles of setting interest spreads are complied with on reinvestment of those funds; - dinar and foreign currency liabilities in respect of deposits, credits and other funds received from abroad in the period from 1 October 2008 to 31 March 2010, until the originally established maturity of such liabilities, but not later than 31 December 2014; - time dinar savings deposits accumulated from 31 October to 8 November until their maturity, provided they are not foreign currency clause-indexed; and - Dinar and foreign currency liabilities arising from financial support provided by the Deposit Insurance Agency in accordance with the law. The Bank is obliged to calculate the obligatory reserves in Dinars based on the average daily balance of liabilities in Dinars in the prior month applying 5% (December 2016: 5%) on the portion of the dinar base and 20% (December 2016: 20%) on the portion of foreign currency base composed of liabilities maturing in less than two years, and 0% % (December 2016: 0%) on the portion of the dinar base and 13% (December 2016: 13%) on the portion of foreign currency base composed of liabilities maturing in the period of over two years. Exception is the portion of dinar liabilities with the foreign currency clause- maturing in the period of over two years on which 100% is applied (% (December 2016: 100%) The Bank allocates the calculated dinar required reserves to its gyro account in Dinars held with the National Bank of Serbia, while the foreign currency obligatory reserve is allocated on the special-purpose account held with the National Bank of Serbia. The Bank calculates the obligatory reserve on the 17th day of the month. The required reserve calculated in such a way is effective for the maintenance period from the 18th day of the month until the 17th day of the following month (the maintenance period ). During the maintenance period, the Bank is obliged to keep the average daily balances of allocated dinar and foreign currency required reserve at the level of calculated dinar/foreign currency obligatory reserve requirements. All days of the maintenance period are taken into account when calculating the average daily balance of allocated (dinar and foreign currency) obligatory reserves. The calculated obligatory reserve in Dinars for December 2017 amounted to RSD 6,438,792 thousand (December 2016: RSD 6,967,023 thousand), while the calculated foreign currency obligatory reserve amounted to EUR 62,693 thousand (December 2016: EUR 67,047 thousand) and they were in line with the aforementioned Decision of the National Bank of Serbia. Interest rate on the amount of average daily balance of allocated dinar required reserves was 1.75% p.a. during (2016: was 1.75%).The National Bank of Serbia does not pay interest on required reserves in foreign currency. 44

47 21. Financial Assets at Fair Value through Profit and Loss Held-for-Trading In RSD thousand Financial derivatives held for trading (Note 40c) 39,569 36,958 Balance as of 39,569 36,958 Detailed information on financial derivatives is disclosed in Note 40(c). 22. Financial Assets Available-for-Sale In RSD thousand Treasury bills - 219,652 State bonds the Republic of Serbia 16,177,632 21,614,875 Equity investments 90,829 83,721 Balance as of 16,268,461 21,918,248 Movements in financial assets available-for-sale during the year were as follows: Treasury bills State bonds Equity investments Treasury bills In RSD thousand State bonds Equity investments Balance as of 1 January 219,652 21,614,875 83,721 1,817,287 9,868,418 87,068 Purchase - 5,304,828-1,500,000 18,089,616 - Sale - (8,839,143) - (1,980,000) (5,501,067) (2,018) Maturity (220,000) (1,259,037) - (1,168,350) (1,210,500) - Fair value changes (84) 101,873 8,021 (9,003) (23,674) (1,298) Discount/premium 432 (148,233) - 56,246 85,567 - Interest - (139,817) ,948 - Foreign exchange differences - (457,714) - 3,472 90,567 7 Less: Impairment (Note 12(a)) - - (913) - - (38) Balance as of 31 December - 16,177,632 90, ,652 21,614,875 83,721 45

48 23. Financial Assets Held-to-Maturity In RSD thousand Discounted bills of exchange 97, ,241 Less: Allowance for impairment ( 37,894) ( 38,291) Balance as of 59, ,950 Movements in the allowance for impairment of financial assets held- to-maturity during the year were as follows: In RSD thousand Balance as of 1 January 38,291 65,129 Impairment losses during the year (Note 12(a)) 10,222 3,737 Reversal of impairment losses during the year(note 12(a)) (3,668) - Write-offs (6,951) (30,575) Balance as of 31 December 37,894 38, Loans and Receivables from Banks and Other Financial Organizations In RSD thousand Foreign currency account 4,194,001 5,236,333 Cheques 5,728 4,421 Loans 1,536,486 1,334,808 Deposits 4,739 4,939 Other placements 1 43,101 Interest and fees 3,554 4,139 Gross loans and advances 5,744,509 6,627,741 Less: Allowance for impairment ( 15,451) ( 50,289) Balance as of 31 December 5,729,058 6,577,452 During 2017, interest rates on interbank placements were from 0.01% to 0.05% on foreign currency placements and from 2.00% to 3.40% on RSD placements. Interest rates on interbank RSD deposits were from 2.70% to 3.00% and on EUR deposits were from 0.44% to 0.37%.. During 2016 interest rates on interbank placements ranged from 0.01% to 0.60% per annum on foreign currency placements, and from 2.50% to 3.14% on placements in Dinars. Interest rates on interbank loans in Dinars ranged from 2.80% to 3.00% per annum. Movements in the allowance for impairment of loans and receivables from banks and other financial institutions during the year were as follows: 46

49 24. Loans and Receivables from Banks and Other Financial Organizations (Continued) In RSD thousand Balance as of 1 January 50,289 48,987 Impairment losses during the year (Note 12(a)) 10,900 5,786 Reversal of impairment losses during the year (Note 12(a)) ( 3,800) ( 1,880) Write-offs ( 38,526) - Foreign exchange differences ( 3,412) ( 2,604) Balance as of 31 December 15,451 50, Loans and Receivables from Customers Retail receivables Housing loans Consumer and Cash loans Overdraft and Credit cards Other loans In RSD thousand ,080,909 14,005,521 23,602,443 20,125,480 2,069,503 2,741,155 1,426 56,936 Total receivables 39,754,281 36,929,092 Corporate receivables Corporate sector loans 38,232,503 42,574,404 Other sectors loans 293,983 1,480,856 Total receivables 38,526,486 44,055,260 Gross loans and receivables 78,280,767 80,984,352 Less: Allowance for impairment ( 4,776,374) ( 11,058,478) Balance as of 73,504,393 69,925,874 As of 31 December 2017, the gross loans in Dinars include loans with a contracted foreign currency clause in the amount of RSD 74,060,709 thousand (31 December 2016: RSD 71,461,192 thousand). During 2017 corporate customers in large and commercial clients segments were granted loans for working capital, investments, overdrafts etc. The most significant part of granted and realized loans relates to loans for working capital, continuing the trend from Throughout the year 2017, the decreasing trend in interest rates is noticeable in the market of the Republic of Serbia. The greatest pressure on the interest rate was in the second half of The decreasing trend applies to all types of loans, respectively for real loans in Dinars, loans in Dinars with a contracted foreign currency clause and for loans in EUR. The average interest rate on loans with a contracted foreign currency clause and loans in foreign currencies for large clients was 2.71% per annum. The average interest rate on loans in Dinars for large and commercial clients was 5.33% per annum. 47

50 25. Loans and Receivables from Customers (Continued) As of 31 December 2017, loans and advances to retail customers were mostly granted as cash loans, overdraft loans, loans based on the use of credit cards, and housing loans Cash loans over one year were approved at interest rates ranging from 9.61% to 16.92% per annum. Overdrafts on citizens current accounts are approved at interest rates ranging from 23.30% to 25% per annum, while the usage of Dina credit cards bears interest at the rate of 26% per annum, VISA credit cards 20%per annum and MasterCard Gold credit cards at the interest rate of 6m Belibor+14% per annum. Long-term housing loans were granted at interest rates ranging from 2.53% to 9.12% per annum. During 2017, SBB placements were mostly disbursed as loans for liquidity (up to two years), as well as overdrafts with one year maturity. Loans for liquidity purposes were granted with interest rates ranging from 6m +2% belibor tо 9% per annum for Dinars, and from 6m+2.9% euribor tо 6.95% per annum for Euro foreign currency clause. Overdrafts were approved in Dinars, at the interest rate of 21% per annum. Movements in the allowance for impairment of loans and receivables from customers during the year were as follows: Loans and receivables from retail customers Loans and receivables from corporate customers Total Loans and receivables from retail customers Loans and receivables from corporate customers In RSD thousand Total Balance as of 1 January 2,967,452 8,091,026 11,058,478 2,626,468 9,291,399 11,917,867 Impairment losses during the year (Note 12a) 1,489,344 1,716,061 3,205, , ,700 1,139,067 Reversal of impairment losses during the year (Note 12a) (505,585) (481,321) (986,906) (70,150) (375,329) (445,479) Write-off (1,984,090) (6,206,711) (8,190,801) (10,801) (1,624,785) (1,635,586) Unwinding Foreign exchange differences (50,083) (259,719) (309,802) 59,568 23,041 82,609 Balance as of 31 December 1,917,038 2,859,336 4,776,374 2,967,452 8,091,026 11,058,478 48

51 26. Intangible Assets In RSD thousand Software Licences Other rights Investment in development Intangible assets under construction Total amount Cost Balance as of 1 January , ,880 15,698 42, ,635 1,154,620 Additions 50, , ,561 Transfer from assets under construction 85, (85,041) - Transfer from fixed assets Balance as of 31 December , ,880 15,698 42, ,917 1,265,537 Accumulated amortisation Balance as of 1 January , , ,360 Amortisation charge (Note 14) 68, ,127 Balance as of 31 December , , ,487 Net book value as of 31 December ,171-15,698 42, , ,050 Cost Balance as of 1 January , ,880 15,698 42, ,917 1,265,537 Additions 71, , ,269 Transfer from assets under construction 198, (198,112) - Transfer from fixed assets under constraction 1, ,351 Reclassification - additions ,959 2,959 Reclassification - decrease (2,959) (2,959) Disposals and write-offs (5,684) (19,804) (25,488) Other (5) (5) Balance as of 31 December ,170, ,076 15,698 42,264 5,158 1,364,664 Accumulated amortisation Balance as of 1 January , , ,487 Amortisation charge (Note 14) 86, ,608 Disposals and write-offs (5,684) (19,804) (25,488) Impairments 360,666-15, ,364 Reclassification - additions ,698 15,698 Reclassification - decrease - - (15,698) - - (15,698) Balance as of 31 December ,045, ,076 15, ,191,971 Net book value as of 31 December , ,264 5, ,693 Based on the Bank s management assessment, in 2017 the Bank impaired software and intangible assets by RSD 376,363 thousand. 49

52 27. Property, Plant and Equipment In RSD thousand Land Buildings Equipment Leasehold improvements Assets under construction Total amount Balance as of 1 January ,854,187 1,907, ,219 19,858 9,550,055 Additions - 8,256 1, , ,643 Transfer from assets under construction - 9,708 69,933 21,422 (101,063) - Transfer to intangible assets (356) (356) Reclassification - additions Reclassification - decrease (919) (919) Reclassification to assets held for sale 9, , ,335 Sales (8) (4,574) (22,497) - - (27,079) Reclassification on investment property - (21,245) (21,245) Disposals and write-offs - - (110,831) - (289) (111,120) Balance as of 31 December ,917 7,014,184 1,845, ,235 93,379 9,753,047 Accumulated amortisation Balance as of 1 January ,959,709 1,497, ,847-5,192,614 Amortisation charge (Note 14) - 113, ,002 21, ,844 Reclassification - additions Reclassification - decrease - - (19) - - (19) Reclassification to investment property - (5,472) (5,472) Reclassification to assets held for sale - 40, ,623 Impairments - 6, ,673 Sales - (2,362) (22,497) - - (24,859) Disposals and write-offs - - (110,831) - - (110,831) Balance as of 31 December ,112,420 1,483, ,440-5,353,592 Net book value as of 31 December ,917 3,901, ,600 32,795 93,379 4,399,455 50

53 27. Property, Plant and Equipment (Continued) Land Buildings Equipment Leasehold improvements Assets under construction In RSD thousand Total amount Balance as of 1 January ,917 7,014,184 1,845, ,235 93,379 9,753,047 Additions - 2, , ,585 Transfer from assets under construction - 56, ,581 17,084 (213,443) - Transfer to intangible assets (1,351) (1,351) Reclassification - additions - 87, , ,283 Reclassification - decrease - (87,416) - - (54,867) (142,283) Sales (3,463) (25,725) (3,406) (32,594) Other (371) (729) (1,100) Disposals and write-offs - - (140,255) (47,396) - (187,651) Balance as of 31 December ,454 7,047,399 1,840, , ,655,936 Accumulated amortisation Balance as of 1 January ,112,420 1,483, ,440-5,353,592 Depreciation charge (Note 14) - 101, ,706 18, ,220 Reclassification - additions - 39, ,729 Reclassification - decrease - (39,729) (39,729) Impairments - 6, ,700 Sales - (8,762) (3,242) - - (12,004) Disposals and write-offs - - (140,246) (47,396) - (187,642) Other - - (194) - - (194) Balance as of 31 December ,211,864 1,466, ,987-5,407,672 Net book value as of 31 December ,454 3,835, ,074 31, ,248,264 The Bank does not have encumbrances established over its buildings as collateral for borrowings. Based on the Bank s management assessment, in 2017 the Bank impaired its buildings by RSD thousand. As of 31 December 2017, due to incomplete cadastral records, the Bank does not have title deeds for buildings with the net book value of RSD 128,717 thousand (31 December 2016: RSD 135,079 thousand). The Bank s management has taken all the necessary measures in order to obtain these title deeds. As of 31 December 2017, the carrying value of equipment under the finance lease arrangements amounted to RSD 366 thousand (31 December 2016: RSD thousand). 51

54 28. Investment Property In RSD thousand Buildings Cost Balance as of 1 January ,933 Sales ( 105,079) Reclassification from administrative and business buildings ( Note 27) 21,245 Reclassification from building for sales ( Note 29) 9,264 Balance as of 31 December ,363 Accumulated depreciation Balance as of 1 January ,573 Depreciation charge (Note 14) 4,626 Reclasification from building for sales (Note 27) 1,777 Reclassification from administrative and business buildings (Note 29) 5,472 Sales ( 26,672) Balance as of 31 December ,776 Net book value as of 31 December ,587 Cost Balance as of 1 January ,363 Sales ( 1,307) Reclassification from foreclosed assets (Note 30) 7,522 Balance as of 31 December ,578 Accumulated depreciation Balance as of 1 January ,776 Depreciation charge (Note 14) 3,144 Sales ( 177) Balance as of 31 December ,743 Net book value as of 31 December ,835 Investment property consists of leased buildings. Rental income from the lease of investment property amounted RSD thousand in 2017 and total rental income from the lease of property is RSD thousand. As of 31 December 2017, due to incomplete cadastral records, the Bank does not have title deeds related to the investment proparty with the net book value of RSD 15,780 thousand (31 December 2016: RSD 16,698 thousand). The Bank s management has taken all the necessary measures in order to obtain these title deeds. During 2017 Bank reclassified assets from foreclosed to investment properties (Note 30). 52

55 29. Non-current Assets Held for Sale The Bank has started to classify property as available for sale since The carrying value of assets held for sale as at 31 December 2016 amounted to RSD 118 thousand. During 2017 the Bank had in the books land held for sale which is sold in Movement on non-current assets held for sale during 2017 and 2016 were as follows: In RSD thousand Balance as of 01. January ,649 Reclassification on administrative and business buildings and land (Note 27) Reclassification on foreclosed assets (Note 30) (136,712) (138,795) Reclassification on investment property (Note 28) (7,487) Sale (39,537) Balance as of 31. December Sale (118) Balance as of 31.December Other Assets In RSD thousand Other investments 16,892 16,964 Foreclosed assets - assets acquired through collection of receivables 173, ,166 Inventory 15,996 23,188 Due interest and fees receivable 15,338 12,854 Advances paid 36,132 30,705 Receivables from employees Deferred expenses 93, ,241 Other 500, ,719 Balance as of 852, ,794 As of 31 December 2017 assets obtained by foreclosure of loans (repossessed property) include commercial buildings, residential buildings, land and equipment. As of 31 December 2017, net book value of foreclosed buildings amount to RSD 172,112 thousand, out of which the amount of RSD 43,981 thousand relate to 3 (three) properties acquired in As of 31 December 2017, due to incomplete cadastral records, the Bank does not have title deeds related to the foreclosed assets with the net book value of RSD 43,912 thousand (31 December 2016: RSD 4,387 thousand). The Bank s management has taken all the necessary measures in order to obtain these title deeds. The remaining amount of foreclosed assets mostly consist of agricultural and industrial land, meadows, fields and pastures (141,177 m2) with the net book value of RSD 1,343 thousand; orchards (19,203 m2) with the net book value of RSD 201 thousand and well forests (18,456 m2) with the net book value of RSD 137 thousand. During 2017 Bank reclassified foreclosed assets to investment properties in amount RSD 7,522 thousand. (note 28). 53

56 30. Other Assets (Continued) In tables below are presented movements on foreclosed assets during the years 2017 and 2016: Types of assets acquired through collection of receivables Residential property Other property Оther assets acquired through collection Total Gross value as of 01.January ,430 8,082 1, ,463 Impairments as of 01.January (5,266) (31) - (5,297) Acquired 44, ,210 Sold (7,387) (28) - (7,415) Reclassified (7,522) - - (7,522) Impairments (108,353) (6,341) (1,951) (116,645) Gross value as of 31. December ,731 8,054 1, ,736 Net value as of 31. December ,112 1, ,794 Types of assets acquired through collection of receivables Residential property Other property Оther assets acquired through collection Total Gross value as of 01.January ,735 8,555 1, ,241 Impairments as of 01.January (5,266) - - (5,266) Acquired 4, , ,324 Sold (3,296) (1,566) (99,697) (104,559) Reclassified 145,432 1, ,456 Impairments - (31) - (31) Gross value as of 31. December ,430 8,082 1, ,463 Net value as of 31. December ,164 8,052 1, , Financial Liabilities at Fair Value through Profit and Loss Held-for-Trading In RSD thousand Financial derivatives held for trading (note 40c) 17,392 17,901 Balance as of 17,392 17,901 Fair value of financial assets and liabilities is disclosed in more details in Note Deposits and Other Liabilities to Banks, Other Financial Organisations and Central Bank In RSD thousand Transactional deposits 1,739, ,164 Deposits as loan collaterals - 2,592,916 Special purpose deposits 35,168 65,268 Other deposits 1,811,917 58,364 Overnight deposits - 940,000 Borrowings (note 40(d)) 2,410,919 1,216,202 Other liabilities 33,016 34,782 Balance as of 6,030,108 5,849,696 54

57 32. Deposits and Other Liabilities to Banks, Other Financial Organisations and Central Bank (Continued) Based on the Revolving Credit Agreement which the Bank concluded in October, 2013 with the EBRD, London, seven disbursements were realized in total amount of EUR thousand during 2017, each with three months maturity and interest rate 3M EURIBOR plus 0,6 points. During 2017, EUR thousand was repaid. The balance of this obligation is EUR thousand on December, 31, The aggregate limit of Issuing Bank Agreement and Revolving Credit Agreement was increased from EUR 10 mil to EUR 30 mil in April, Deposits and Other Liabilities to Other Customers In RSD thousand Transactional deposits 30,311,350 31,598,215 Savings 49,829,707 54,599,088 Deposits as loan collaterals 1,300,495 1,108,104 Special purpose deposits 958, ,570 Other deposits 13,965,317 9,563,495 Overnight deposits 591, ,000 Other liabilities 193, ,440 Balance as of 97,149,605 98,559,912 Demand deposits in dinars mostly consist of current accounts of corporate customers, entrepreneurs and retail customers held with the Bank. Demand deposits of legal entities segmented as large and commercial clients in dinars and in foreign currencies are noninterest bearing, except for special arrangements defined by individual contracts with very important clients During 2017, the average interest rate on transaction deposits of legal entities segmented as large and commercial clients in Dinars was 1.39% and in a foreign currency 0.13% annually. Exceptions are demand deposits in Dinars of beneficiaries of the budgetary funds of the Republic of Serbia and local authorities, to which the Bank calculated and paid interest. The average interest rate in 2017 for such deposits was 3.35% per annum. Retail customers current accounts are non-interest bearing. On Retail a vista deposits opened until July 2017, Bank applies interest rates in range from 0.1% to 0.8% on annum basis, depending on the currency. For accounts opened after that period, Bank doesn t calculate interest. As of 31 December 2017, the major transaction depositors of the Bank are: Telekom Srbija a.d. Belgrade,Sokoj the music authors organization, Hipotekarna Banka a.d Podgorica, OTP leasing doo Beograd, Sportsko-rekreativno-banjski kompleks Bailo doo Novi Sad, Društvo za promet I usluge Chemical Агросава doo Beograd, accounting for 14.98% of the total outstanding balance of transaction deposits at the balance sheet date. Time deposits of legal entities segmented as large and commercial clients in Dinars earn interest at rates depending on the period and the amount for which the funds have been deposited. The interest rates on time deposits in Dinars are adjusted in accordance with market trends. During 2017 the average interest rate on time deposits in Dinars was 2.98% annually. Interest rates on term deposits in Dinars were in decline during The expectation are that in 2018 this trend of decreasing interest rates on RSD deposits will stop and in first half of 2018 it is expected slight increase. During 2017 the Bank did not focused on term deposits in Dinars with a foreign currency clause due to the regulatory reserve requirements and the focus were Dinars deposits None-purpose time deposits of SBB customers in Dinars during 2017 were deposited with an average interest rate of 2.69% annually, and time deposits of physical persons-citizens with an average interest rate of 3.11% annually. Time deposits of legal entities segmented as large and commercial clients in foreign currencies earn interest which depends on the currency, the period and the amount for which the funds have been deposited. Interest rates on foreign currency time deposits are adjusted in accordance with market trends. The average interest rate on time deposits in foreign currencies in 2017 was 0.38% annually. 55

58 33. Deposits and Other Liabilities to Other Customers (Continued) None-purpose time deposits of SBB customers in foreign currencies during 2017 were deposited with an average interest rate of 0.26% annually, and time deposits of physical persons-citizens with an average interest rate of 0.53% annually. As of 31 December 2017, the major depositors of the Bank with time deposits are: Naftna industrija Srbije a.d.novi Sad, Deoničko društvo Robne kuće Beograd - in bankruptcy, OTP Banka PLC, Ivo Lola Ribar sistem a.d. Beograd in bankruptcy, Njegoš AIP - in bankruptcy, KMG Trudbenik a.d - in bankruptcy, Stečajna masa Peščara a.d.- in bankruptcy, accounting for 20.28% of the total outstanding balance of time deposits at the balance sheet date. 34. Provisions In RSD thousand Provision for litigations 239, ,599 Provision for retirement benefits 255,657 - Provision for Retirement 231, ,383 Provisions for credit risk off-balance sheet items 24,507 29,071 Provisions for other liabilities 5,657 - Balance as of 757, ,053 Litigations: The Bank acts as a defendant in certain number of claims and legal actions and proceedings arising in the ordinary course of business (Note 40(b)). These actions and proceedings are generally based on alleged violations of consumer protection, banking, employment and other laws. None of these actions and proceedings is individually material. The Bank establishes provisions for all litigations, for which it believes it is probable that a loss will be incurred and the amount of the loss can be reasonably estimated. These provisions may change from time to time, as appropriate, in light of additional information. However, in the opinion of management the ultimate disposition of these matters is not expected to have a materially adverse effect on the Bank s financial position, results of its operation or its cash flows above the amount for which the provisions have been recognized. The provisions for retirement benefits have been recorded in the Bank s financial statements on the basis of an independent actuary s calculation as of 31 December 2017, and are stated in the amount of present value of the future outflows. The assumptions disclosed in the Note 3.18(b) have been used for the calculation of the present value of the expected outflows. Movements in provisions during the year are presented in the following table: Provisions for litigations Provisions for covering liabilities 2017 In RSD thousand Provision for retirement benefits Provisions for off-balance sheet items Provisions for other liabilities Balance as of 01. January 141, ,383 29,071 - Release of provisions (5,112) - (26,285) (7,568) - Charge for the year 103, ,657 29,117 3,202 5,657 Paid during the year - - (2,180) - - Actuarial gains - - (9,234) - - Exchange rate 1 (198) - Balance as of 31. December 239, , ,802 24,507 5,657 56

59 34. Provisions (Continued) Provisions for litigations Provisions for covering liabilities Provision for retirement benefits 2016 In RSD thousand Provisions for offbalance sheet items Provisions for other liabilities Balance as of 01. January 124, ,710 14,825 - Release of provisions (14,560) - (27,867) (6,545) - Charge for the year 31, ,135 20,781 - Paid during the year - - (95,486) - - Amount recognized in OCI - - (21,110) - Exchange rate Balance as of 31. December 141, ,383 29, Other Liabilities In RSD thousand Liabilities to suppliers 105, ,086 Advances received 20,808 20,717 Finance lease liabilities 403 3,005 Liabilities for salaries and other liabilities to employees 4,410 57,426 Taxes payable 4,097 52,573 Deferred expenses 106, ,359 Other liabilities 476, ,000 Balance as of 718, , Equity In RSD thousand Share capital 16,337,550 16,337,550 Profit/Losses (2,107,478) 301,037 Reserves (Note 37) 3,739,657 3,337,432 Balance as of 17,969,729 19,976,019 As of 31 December 2017 and 2016, subscribed and paid in share capital of the Bank consist of 1,633,743 ordinary shares, with nominal value per share of RSD 10,000. The Bank s shareholders are entitled to take part in the Bank s decision-making commensurately with their interest in the total amount of the Bank s ordinary shares, in the distribution of profit, priority purchase rights of shares from subsequent issuances, priority collection rights in the event of the Bank s bankruptcy or liquidation. In December 2006, in accordance with the terms of the Agreement on the Purchase and Sale of Share Capital, the National Bank of Greece, Athens became the major owner of the Bank through the acquisition of an equity interest of 99.43%. The aforementioned acquisition was duly registered with the Central Securities Depository and Clearing House on 12 December Pursuant to the Articles of Incorporation no /2 and Decision on Increase in Capital no /3 dated 29 November 2007, the share capital of the Bank was increased through the issue of 410,000 ordinary shares with the individual par value of RSD 10,000. The National Bank of Greece, Athens purchased the entire share issue, and thereby became the sole owner of the Bank. 57

60 36. Equity (Continued) In accordance with the Decision issued by the Bank s General Assembly dated 3 January 2008, the Bank enacted the Decision on the Merger of with the National Bank of Greece a.d. Belgrade, in effect from 31 December The aforementioned merger was registered with the Serbian Business Registers Agency on 14 February 2008 under the registry number BD 6190/2008 (removal of the business entity National Bank of Greece a.d. Belgrade as the acquired bank due to a merger) and the change in the core capital of was inscribed based on the Decision numbered BD 6210/2008. The National Bank of Greece a.d. Belgrade was fully owned by the National Bank of Greece, Athens. Pursuant to the aforesaid Decision dated 3 January 2008, enacted by the Bank s General Assembly, the Bank s capital increased through the issue of shares without public offer for the amount of RSD 7,419,535 thousand (741,953 ordinary shares with the individual par value of RSD 10,000), i.e., in the amount equal to the share capital of the National Bank of Greece a.d. Belgrade. These shares were transferred to the shareholder of the entity which discontinued its operations, i.e., the National Bank of Greece, Athens, Greece. is the legal successor of all rights and liabilities of the National Bank of Greece a.d. Belgrade existing before the merger date, i.e., 31 December In 2017, the Bank carried out the allocation of retained earnings from previous years in the amount of RSD 301,037 thousand to other reserves (reserves from profit). As of 01 December 2017, OTP Bank Serbia a.d Novi Sad became 100% owner of Vojvodjanska Banka a.d Novi Sad. 37. Reserves In RSD thousand Revaluation reserve of available for sale securities 198, ,952 Actuarial gains/losses for defined benefit plans 33,076 25,227 Other reserves-reserves from profit 3,508,291 3,207,253 Balance as of 3,739,657 3,337,432 As disclosed in Note 35 to the financial statements, based on the Decision of the Bank s General Assembly dated 27 April 2017, retained earnings from previous years in the amount of RSD thousand were allocated to other reserves. 38. Dividends The Bank s Assembly adopts the annual financial statements and passes the decisions on profit/losses allocation. Since 2006 and onwards the Bank did not pay dividends to the shareholder. Positive financial results from previous years remained unallocated within core capital and reserves from profit (Note 36). 39. Tax Effects Related to Other Comprehensive Result In RSD thousand Gross Tax Net Gross Tax Net Items of other comprehensive result that cannot be reclassified to profit or loss: Actuarial gains 9,234, (1,385) 7,849 21,109 (3,166) 17,943 Total 9,234 (1,385) 7,849 21,109 (3,166) 17,943 Items of other comprehensive result that may be reclassified to profit or loss: Unrealized (losses)/gains on securities available for sale 109,809 (16,470) 93,339 (34,259) 5,138 (29,121) Total 109,809 (16,470) 93,339 (34,259) 5,138 (29,121) Total other comprehensive result for the period - loss 119,043 (17,855) 101,188 - (13,150) 1,972 (11,178) 58

61 40. Off-balance Sheet Items In RSD thousand Funds managed on behalf of third parties (a) 660, ,418 Irrevocable commitments (b) 6,618,161 7,762,980 Financial derivatives (c) 13,426,778 18,901,108 Other off-balance sheet assets (d) 259,432, ,050,694 Balance as of 280,137, ,377,200 (a) Funds managed on behalf of third parties as of 31 December 2017 and 2016, mostly relate to funds received from the public sector customers and entrusted to the Bank s management. In RSD thousand Funds managed on behalf of third parties: - in RSD 604, ,045 - in foreign currency 55,320 64,373 Balance as of 660, ,418 Assets managed on behalf of third parties mostly include loans based on the Loan for Economic Revival of Serbia, loans from the Development Fund of the Republic of Serbia for financing registered farms, loans disbursed from funds of the Ministry of Agriculture, Forestry and Water Management and the loans approved by companies to their employees or other businesses through the Bank as an intermediary. The Bank charges fees for performed services on this basis. The loans that the Bank, as administrator, disbursed to registered farmers from the funds received from the Ministry, the debtors are not returned in a timely manner, in accordance with the covenants of Agreement or related Annexes. The Ministry procedure of collecting the due receivables from debtors transferred to the State Attorney's Office. The State Attorney's Office has takenover the obligation to call the debtor to pay the remaining amount of the loan plus accrued interest. Also, in contact with the debtor, the competent Public Attorney's Office has been authorized to offer payment of the debt in installments. After the expiry of the agreed period for payment of debt on offer, or if the debtors does not accept the conditions of offer, the Public Attorney's Office launch a procedure infront of the competent court, in order to collect debts increased by the costs of the proceedings. Contacted debtors are mainly carried out restitution claims required in order to avoid additional costs on the loan. (b) Irrevocable commitments relate to contractual commitments that cannot be cancelled unilaterally and without prior notification if certain conditions are not met. These amounts are included in the basis for calculation of credit risk-weighted off-balance sheet items. Irrevocable commitments relate to guarantees issued by the Bank on order of its clients based on contractual commitments to make loans that cannot be cancelled unilaterally, such as: overdrafts, revolving loans to companies, multi-purpose revolving loans and other irrevocable commitments. Irrevocable commitments usually have fixed expiry dates or other stipulations with respect to expiry dates. Since irrevocable commitments may expire without being drawn upon, the total contracted amounts do not necessarily represent future cash requirements. The Bank monitors maturity periods of credit commitments and undrawn credit facilities as longer term commitments have a greater degree of loan risk than short-term commitments. In RSD thousand ,462,512 4,138,630 Issued guaranties and other warranties Warranty for liabilities (EBRD) 17,771 18,521 Irrevocable loan limits 3,137,878 3,513,001 Other irrevocable commitments Balance as of - 92,828 6,618,161 7,762,980 59

62 40. Off-balance Sheet Items (Continued) (b) Irrevocable Commitments (Continued) А larger decrease on the position Other irrevocable commitments in the total amount of the Bank s irrevocable commitments as of 31 st December 2017 occurred as compared to the same reporting date in the year 2016: - due to a drop of the exchange rate of EUR and USD currencies in the year 2017, a decrease of certain positions and of the total amount occurred on the positions for issued guanarantees and other warranties, warranties for liablities (EBRD), and other irrevocable commitments; - the number of issued guarantees to clients had no material decrease; - the number of active batches of letters of credit is approximately on the same level as in the previous year; - certain clients appear who had an active contract for a letter of credit in the year 2016, but in the year 2017 the contract was not renewed; - new clients appear who used the letter of credit as a payment instrument in the year 2017;and - the conditions were met for removal of the receivables for irrevocable commitments towards debtor Begej ad Zrenjanin in bankruptcy from the Bank s business books, pursuant to adopted Decision of the Write-off Committee on the removal of all receivables from the mentioned debtor from the books As of 31 December 2016 the Bank did not have pledged financial assets. (c) Financial derivatives as of 31 December 2017 and 2016 are derivatives held for trading and include future liabilities and receivables of the Bank related to term foreign currency sale/purchase, currency and interest rate swaps. Nominal value Fair value of receivables Fair value of liabilities Nominal value Fair value of receivables In RSD thousand Fair value of liabilities Financial derivatives held-fortrading: Term foreign currency sale/purchase 3,570,549 2, , Currency swaps 9,856,229 37,257 16,637 12,494,584 19,960 3,340 Interest rates swaps ,677,404 16,230 14,351 Total 13,426,778 39,569 17,392 18,901,108 36,958 17,901 (d) Other off-balance sheet items as of 31 December 2017 mostly consist of received collaterals for disbursed loans, cross border loans, suspended interest and issued revocable limits etc. In RSD thousand Received collaterals 200,659, ,187,926 Credit lines received from EBRD 1,125,491 - Revocable commitments 6,395,298 8,913,354 Cross border loans 26,011,528 35,898,650 Spot purchase/sale of foreign currency 5,755,498 3,632,430 Suspended interest 8,485,402 9,853,532 Other 11,000,056 4,564,802 Balance as of 259,432, ,050,694 EBRD Trade Facilitation Programme signed in 2013, is used in the amount of RSD 2,428,690 thousand as of 31 December Used amount in respect of the EBRD arrangement related to the borrowing is RSD 2,410,919 thousand (Note 33) and to guarantees in the amount of RSD 17,771 thousand. The unused part of the EBRD arrangement is 1,125,491 thousand RSD as of 31 December As at 31 December 2017, the Bank transferred off balance sheet assets to a low level of collectability in accordance with the NBS Decision on accounting write-off in total amount 6,535,165 thousand. 60

63 41. Commitments and Contingent Liabilities (a) Operating Lease Commitments The Bank has entered into commercial operating lease agreements on certain business premises. The future minimum lease payments are as follows: In RSD thousand Up to 1 year 242, ,617 From 1 to 5 years 534, ,139 Over 5 years 171, ,987 Balance as of 948,980 1,024,743 (b) Litigations As of 31 December 2017, the Bank acted as a defendant in a certain number of legal proceedings. The total estimated value of damage claims arising from the litigations, including court expenses and interest, amounts to RSD 907,762 thousand (31 December 2016: RSD 858,099thousand). The final outcome of the legal proceedings is assessed by the legal representatives of the Bank.. As disclosed in Note 33 to the financial statements, as of 31 December 2017, the Bank recognized provision of RSD 239,584 thousand (31 December 2016: RSD 141,599 thousand) for potential losses that might arise as a result of the litigations with estimated negative outcome. The above stated amount includes penalty interest from damage claims together with court expenses calculated throughout 31 December The Bank s management considers that no material losses will arise from the remaining litigations still in course, other than those provided for. 42. Tax Risks The tax system of the Republic of Serbia is in a process of constant revision and changes. In the Republic of Serbia the tax period is open during the course of five years. In different circumstances, the tax authorities may have different approach to certain issues and may establish additional tax liabilities along with additional penalty interests and penalties. As a result of the above, transactions can be contested by tax authorities and certain additional amounts of taxes, fines and interests can be imposed to the Bank. The prescription period of a tax obligation is five years. Besides that, the Bank performs a certain number of business transactions with its related legal entities in the country and abroad. The Bank presented the effects of transfer prices on the basis of transactions with its related legal entities on the calculated corporate income tax for the year 2017 to the best of its knowledge. Furthermore, pursuant to the tax regulations of the Republic of Serbia, the Bank is committed to submit the tax return for the year 2017 and other prescribed documentation to the tax authorities of the Republic of Serbia by 29 th June Interpretations of tax laws by the tax and other authorities with respect to transactions and activities of the Bank may differ from the interpretation of the Bank s management. There is uncertainty as to whether the interpretations of the Bank s management and the accompanying documentation are sufficient, and whether they correspond to requirements and interpretations of the tax and other authorities. The Bank s management is of the opinion that any different interpretation will not have materially significant consequences on the Bank s financial statements. During the last five years the Bank did not have tax audit of the corporate income tax presented in the tax returns and paid. Starting from the tax return for the year 2012, tax returns can be subject to tax audit. The Bank s management is of the opinion that the tax liabilities recorded in the accompanying financial statements are correctly stated. 61

64 43. Risk Management 43.1 Introduction Mission The risk management-related activities at all organisational levels are led by the mission to achieve value for shareholders by optimising the risk to return ratio, taking into account interests of both clients and employees in accordance with the best practice and in conformity with regulatory requirements. Тhe Bank has established a comprehensive risk management system, which includes the following comprehensive objectives: Establishment of a set of basic principles and standards for risk management in the Bank to maximally use the potential for revenue and opportunities enabling to achieve the value for shareholders; Support to the Bank s business strategy by ensuring that business goals are achieved with a controlled risk in order to preserve the revenue stability by way of hedging from unexpected losses; Improvement of the use and allocation of capital and increase of revenue from invested capital adjusted to risks by including risk in the measurement of business performance; Support to the decision-making process by providing necessary risk-related assessments; Providing harmonisation with best practice as well as with local regulatory, quantitative and quality requirements; and Providing cost-effectiveness of risk management by reducing overlaps and by avoiding inadequate, excessive or outdated policies, processes, methodologies, models, controls and systems. Management and Organisational Framework The Bank s Board of Directors is responsible for the establishment of a singular risk management system and its supervision. In terms of this, the Board of Directors adopts strategies and policies for identifying, measuring, monitoring and controlling risk, it determines the Bank s internal organisation which ensures segregation of duties, authorities and responsibilities of employees in the manner that prevents conflict of interest and it undertakes other activities with reference to defining goals and risk management principles. The Committee for monitoring bank s operations (Audit Committee), formed by the Board of Directors, contributes to the efficiency of supervision over the risk management system. On a monthly basis it analyses and performs supervision over the application and proper implementation of adopted risk management strategies and policies and implementation of the system of internal controls, and it analyses and adopts proposals of those strategies and policies which are submitted to the Board of Directors for adoption. The Bank s Executive Board is responsible to identify risks to which the Bank is exposed and to perform control of such risks in accordance with the framework defined by the Board of Directors. The Bank s Executive Board adopts procedures and other internal acts which govern in more detail the processes and procedures for risk identification, measurement, monitoring and control. An independent monitoring and control of the efficiency of functioning of the Bank s internal control system and regularity of work, including the implementation of the risk management framework, is ensured by the establishment of the Internal Audit Division which is accountable for its operation to the Board of Directors. The Bank s internal organisation is determined in a manner that ensures a functional and organisational separation of risk management activities from regular business activities, up to the Bank s Executive Board level. Risk management is implemented within two divisions and one department: Risk Management Division (Portfolio and Classification Management Department; Credit Models Department; Market Risk Management Department and Operational Risk Management Department); Credit Risk Management Division (Corporate Credit Risk Department; Retail Credit Initiation Department); and Security Department. The Bank provided an adequate framework for the management of destressed assets and formed separate organizational part for distressed assets management. (both corporate and retail). Trouble Asset Management Division. The Compliance Division is in charge for compliance risk identification, monitoring and management. 62

65 43. Risk Management (Continued) 43.2 Credit Risk Credit risk represents the possibility of occurrence of adverse effects on the Bank s financial result and capital due to the debtor s failure to perform contracted obligations. The credit risk primarily occurs in connection with lending activities, but in connection with other activities as well, such as: guarantee operations, operations of financing trade, trade activities and similar. Credit risk is materially the most important risk to which the Bank is exposed. Credit process The Bank has established and maintains corresponding processes of granting credit exposures which include: Detailed and completely documented credit risk policies, which provide decision-making consistency at Bank s level, and which take into account the basic regulatory requirements of the National Bank of Serbia Adequate and clearly defined criteria of credit exposures based on a specific target market, debtor or counterparty and transaction, as well as the loan purpose, structure and source for its repayment; Credit limits which include different types of exposures at various levels (individual debtors, groups of related persons, products and similar); and Clearly established procedures for granting new loans, as well as for modifications, renewals or refinancing of existing loans. The process of continuous credit risk measurement, monitoring and control is based on the following: Consistent tools for scoring and ranking of credit placements (RM3 corporate credit risk rating system and Score cards for retail lending) in order to improve and standardise the credit assessment, and to set a system of limits adjusted to the level of assessed risk; Regular monitoring process of credit exposures adjusted both to the regulatory requirements and best practice standards, which includes: regular audit of credit exposures in intervals no less than once a year (depending on the internal rating), monitoring of early warning indicators, quarterly revising of the regulatory classification, regular audit and updating risk parameters and similar; and Information systems and analytical techniques enabling credit risk measurement which exists in all relevant activities, and providing adequate information on the content of the credit portfolio including the identification of a possible risk concentration. The Bank has ensured adequate internal controls over processes related to credit risk, including: Separation of the lending function from the function of credit risk monitoring and management; Committees for granting all credit exposures, with escalation of authorities for granting credit exposures in accordance with the amount of such exposure; Participation of the Credit Risk Management Division in such committees with the right of veto; Periodical and timely corrective measures for loans where deterioration is detected, as well as NPL management; and Independent, continuous credit risk management process assessment by the Internal Audit. Credit Risk Measurement and Monitoring Since 2008 the Bank has been using the credit rating model of client s-rm3 for corporate risk rating, which is used for quantifying risk parameters (PD parameters), defining exposure limits, as well as for determining the degree of impairment of financial assets (in more detail Note and 4.1). The model consists of 10 rating categories for clients which are not in the status of default. Different exposures towards the same debtor receive the same rating category, regardless of the specificity of the financing form in question (for example types of products, collateral, etc). The rating is determined at least once a year within the scope of the regular audit of credit exposures. The model validation is performed at least once a year, and risk parameter calibration when necessary. In addition to the above stated, the Bank applies the internal classification for the corporate portfolio according to 5 categories (GA to GE). This classification is also determined (or confirmed) during each credit exposure revision. The basic objective of the internal classification system is to timely identify and resolve possible problems in collection of receivables, and as a consequence it serves as a foundation for determining the revision frequency of credit exposures according to the assessed risk level before the competent decision-making bodies in the credit process. 63

66 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Monitoring of the retail portfolio is performed based on a range of indicators, as well as by extraordinary analysis depending on the perceived changes in the risk factors. Pursuant to the regulations of the National Bank of Serbia, the Bank regularly inspects and classifies its corporate and retail portfolio (scale from A to E). In order to monitor the quality of assets, the Bank has improved classification of receivables to a group of non-performing exposures or a group of performing exposures, whereby each of these groups includes a subset of restructured receivables. Non-performing receivable the Bank defines as a receivable for which at least one of the following conditions is met: The Debtor is overdue more than 90 days for such receivable, The Bank, based on the assessment of the financial condition and creditworthiness of the debtor, has estimated that the Debtor will not be able to meet its obligations in full without activation of collateral, regardless of whether the debtor settles its obligations dully or not, There is an onset of a default obligation in accordance with the decision regulating the adequacy of the Bank s own funds (capital), For a given receivable the impairment was determined through assessment on an individual or group basis, except for receivables for which that amount cannot be identified on an individual receivable level within the group, the recevable is disputed. Concentration Risk Management The Bank manages the loan granting process, controls credit risk exposures and ensures harmonisation with regulatory limits by the system of internal limits. The Bank s Board of Directors adopts exposure limits and they are an integral part of the credit policy. Each exceeding of limit requires approval by the higher decision-making level. Exposure limit towards a debtor is the maximum allowed exposure level towards an individual debtor depending on the awarded credit rating, but not above the level prescribed by the regulation of the National Bank of Serbia. The limit system includes the maximum allowed exposures towards a group of debtors with same or similar risk factors (group of related persons which are determined in accordance with the statutory definition). The Bank is exposed to counterparty risk in connection with interbank transactions (secured and unsecured), financial and credit derivatives, as well as transactions based on securities. This risk stems from the possibility that the counterparty fails to settle its liabilities in the transaction prior to the final settlement of cash flows, i.e. settlement of liabilities under that transaction. Counterparty limits, as the basic manner of counterparty risk management, are incorporated in a comprehensive system of limits, which are based on the solvency assessment of the financial institution (dominantly based on external credit rating) as well as product type. 64

67 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Maximum Exposure to Credit Risk Maximum exposure to credit risk, without taking into account collateral or other means of reducing such risk, as of 31 December 2017 and 2016 are presented in the following table. For balance sheet items, the exposures represent the net book value of receivables in accordance with the balance sheet positions Gross value Bank assets exposed to credit risk Accumulated allowances for impairment/provisions Bank assets not exposed to credit risk (In RSD thousand) Balance sheet value Balance sheet items Cash and assets held with the central bank 16,787,921-16,787,921 4,628,556 21,416,477 Financial assets recognised at fair value through income statement and held for trading 39,569-39,569-39,569 Financial assets available for sale 16,295,171 26,710 16,268,461-16,268,461 Financial assets held to maturity 97,080 37,894 59,186-59,186 Loans and receivables from banks and other financial organisations 5,744,509 15,451 5,729,058-5,729,058 Loans and receivables from clients 78,280,767 4,776,374 73,504,393-73,504,393 Intangible investments , ,693 Property, plant and equipment ,248,264 4,248,264 Investment property , ,835 Deferred tax assets , ,874 Non-current assets held for sale and discontinued operations Оther assets , ,983 On-balance sheet exposureissued 117,245,017 4,856, ,388,588 10,339, ,727,793 Off-balance items Issued guaranties and warranties 3,462,512 6,040 3,456,472-3,456,472 Contingent liabilities 3,137,878 18,466 3,119,412 6,395,298 9,514,710 Off-balance sheet exposure 6,600,390 24,506 6,575,884 6,395,298 12,971,182 Total exposure 123,845,407 4,880, ,964,472 16,734, ,698,975 Net value 65

68 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Maximum Exposure to Credit Risk (Continued) Gross value Bank assets exposed to credit risk Accumulated allowances for impairment/provisions Bank assets not exposed to credit risk (In RSD thousand) Balance sheet value Balance sheet items Cash and assets held with the central bank 14,914,831-14,914,831 6,007,498 20,922,329 Financial assets recognised at fair value through income statement and held for trading 36,958-36,958-36,958 Financial assets available for sale 21,972,219 53,971 21,918,248-21,918,248 Financial assets held to maturity 428,241 38, , ,950 Loans and receivables from banks and other financial organisations 6,627,741 50,289 6,577,452-6,577,452 Loans and receivables from clients 80,984,352 11,058,478 69,925,874-69,925,874 Intangible investments , ,050 Property, plant and equipment ,399,455 4,399,455 Investment property , ,587 Deferred tax assets , ,184 Non-current assets held for sale and discontinued operations Оther assets , ,794 On-balance sheet exposureissued 124,964,460 11,201, ,763,431 12,134, ,897,999 Off-balance items Issued guaranties and warranties 4,231,459 14,376 4,217,083-4,203,209 Contingent liabilities 3,513,002 13,874 3,499,128 8,913,354 12,426,356 Off-balance sheet exposure 7,744,461 28,250 7,716,211 8,913,354 16,629,565 Total exposure 132,708,921 11,229, ,479,642 21,047, ,527,564 As shown in the previous table, as of 31 December 2017, 54.2% of the maximum exposure to credit risk relate to loans and receivables from customers (2016: 49.1%), 15.8% to cash and balances with central banks (2016: 14.6%) and 12.0% to financial assets available for sale (2016: 15.4%), while off balance sheet items comprise 9.6% of the total credit risk exposure (2016: 11.7%). Net value 66

69 43. Risk Management (Continued) 43.2 Credit Risk (Continued) In terms of credit risk exposure, the main source of exposure relates to loans and receivables from customers, banks and financial organizations whose structure by quality, branch and geographical concentration, by sectors, categories of claims, security status, delinquency, problematic and forborne claims will be shown in the tables below on this credit risk note. At the positions of the financial assets held for sale and cash and balances with the central bank, the largest part relates to receivables from the Republic of Serbia (Note 21) and the National Bank of Serbia (Note 19) that bear a low level of credit risk Credit Hedging and Other Measures for Reducing Credit Risk The basic way of mitigating credit risk is by taking loan collateral. In its loan policies, the Bank has determined the types of acceptable collateral in the form of funded and unfunded credit protection. The Bank s internal acts regulate in more detail the conditions of obtaining such collateral as well as the coefficients for calculating secured value in relation to the type of collateral for the requirements of the credit process. For calculating required reserve for estimated losses according to the regulations of the National Bank of Serbia, the Bank recognises security instruments which meet conditions prescribed for their recognition. The basic types of collateral which the Bank uses to mitigate credit risk are: residential property mortgage, business property mortgage, pledge of equipment, inventory and receivables, guarantees, financial assets (cash, securities), warranties. The values of collateral are monitored and updated regularly in accordance with the frequency stated in the Bank s internal acts, which is no longer than 3 years. The Property Management Division coordinates the appraisal of the property value, and it is performed by external authorised appraisers with which the Bank has a regulated cooperation. The value of collateral in the following tables is presented according to their assessed market value, up to the maximum amount of gross exposure under which they were received. 67

70 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Type and value of collaterals and guarantors by sector and category of receivables as of 31 December 2017 and 2016 are presented in the following table: Type and value of collaterals and guarantors by sector and category of receivables Deposits Securities Pledge of warehouse Residential Other immovable receipt and immovable property property livestock Other assets Goverment Bank collateral Retail receivables 25,275-12,291,101 47, Housing loans 6,556-12,242,142 44, Consumer and cash loans 18,719-48,958 3, Transaction loans and credit cards Оther receivables Corporate receivables 740, ,576 6,052,731-7,572, , ,264 Large enterprises ,826 1,974,115-2,146, Small and medium-sized enterprises 599, ,882 2,735,616-4,557, ,264 Micro enterprises and entrepreneurs 139,537-63, ,925-26, Farmers 2,011-13, , , Public enterprises ,500-83, ,885 - Receivables from other clients ,294, Total exposure 766,110-13,162,677 6,100,773-8,866, , ,264 By category of receivable Performing receivables 762,250-11,731,632 3,566,438-8,800, , ,264 Of which: forborne , Non-performing receivables 3,860-1,431,045 2,534,335-65, Of which: forborne ,676 1,019,164-12, Total exposure 766,110-13,162,677 6,100,773-8,866, , ,264 68

71 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Deposits Securities Residential immovable property Type and value of collaterals and guarantors by sector and category of receivables Other immovable property Pledge of warehouse receipt and livestock collateral Guarantees issue Other assets Goverment Bank Retail receivables 67,250-12,436,117 67, Housing loans 10,329-12,349,660 54, Consumer and cash loans 56,921-71,461 4, Transaction loans and credit cards Оther receivables ,996 8, Corporate receivables 3,134, ,415 7,636,569-6,079,370 1,381, ,094 Large enterprises 2,490,303-89,055 3,709,966-2,671, Small and medium-sized enterprises 511, ,929 2,359,438-2,771, ,094 Micro enterprises and entrepreneurs 119,305-71, ,438-21, Farmers 13,638-37,615 1,197, , Public enterprises ,381,295 - Receivables from other clients Total exposure 3,201,629-13,340,532 7,704,519-6,080,223 1,381, ,094 By category of receivable Performing receivables 3,164,919-11,802,189 5,488,632-5,776,997 1,381, ,094 Of which: forborne , , Non-performing receivables 36,710-1,538,343 2,215, , Of which: forborne 1, , ,393-36, Total exposure 3,201,629-13,340,532 7,704,519-6,080,223 1,381, ,094 69

72 43. Risk Management (Continued) 43.2 Credit Risk (Continued) The LTV ratio represents the ratio between the amounts of loans and appraised property value received as collateral. The structure of mortgage loans per scale of the LTV ratios is presented in the following overview: LTV ratio receivables secured by mortgage (in RSD thousand) Value of LTV ratio Value of receivables secured by mortgage on immovable property Retail receivables: < 50% 2,796,217 2,883,209 50%-70% 3,422,749 3,223,076 70%-90% 3,961,977 3,596,630 90%-100% 741,160 1,103, %-120% 972,402 1,119, %-150% 501, ,858 >150% 1,745,221 1,531,108 Total 14,141,632 14,126,163 Average LTV ratio 71.74% 76.46% Corporate receivables: < 50% 2,546,945 3,358,416 50%-70% 1,519, ,900 70%-90% 1,067, ,906 90%-100% 303,221 1,456, %-120% 531, , %-150% 835, ,007 >150% 2,372,358 6,035,660 Total 9,177,000 13,004,128 Average LTV ratio % % Foreclosed Assets The largest portion of foreclosed assets pertains to real estate (buildings). The Bank is undertaking all necessary activities to sell the foreclosed assets within reasonable period of time. The foreclosed assets are presented within Other assets in the balance sheet, with exception when it is determined that the property will be used in the Bank s regular course of business activities, i.e., as investment property or own property of the Bank (Note 29). 70

73 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Loans and Receivables from Customers The quality of loans and receivables from customers as of 31 December 2017 and 2016 are presented in the following tables: Total exposure: In RSD thousand Unimpaired receivables Not due Due Impaired receivables Individualy estimated Collectivity estimated Total gross receivables Аccumulated allowances for impairment Individualy estimated Collectivity estimated Total net receivables Securing unimpaired receivables Value of collateral Securing impaired receivables Retail receivables 35,266,901 2,070, ,776 2,210,082 39,754,281 (61,015) (1,856,023) 37,837,243 11,394, ,471 Housing loans 12,463, , , ,921 14,080,909 (28,695) (648,821) 13,403,393 11,334, ,445 Consumer and cash loans 21,410,221 1,516,989 9, ,518 23,602,443 (5,487) (619,463) 22,977,493 60,009 11,026 Transaction loans and credit cards 1,392,908 75,543 26, ,218 2,069,503 (26,833) (586,314) 1,456, Оther receivables - 1-1,425 1,426 - (1,425) Corporate receivables 33,513,959 1,069,206 3,334, ,116 38,623,563 (2,477,767) (419,463) 35,726,333 12,657,553 2,929,893 Large enterprises 11,734,409 15,392 1,049, ,799,102 (569,941) (14,995) 12,214,166 3,224, ,201 Small and medium-sized enterprises 14,157, ,857 1,702, ,931 17,008,667 (1,436,932) (141,472) 15,430,263 7,482,280 1,370,118 Micro enterprises and entrepreneurs 837,558 72, , ,367 1,731,562 (313,996) (227,795) 1,189, , ,420 Farmers 3,002,092 25, ,033 37,788 3,294,502 (149,398) (33,724) 3,111,380 1,559, ,654 Public enterprises 3,782,230-7,500-3,789,730 (7,500) (1,477) 3,780, ,938 7,500 Receivables from other clients 5,744, ,744,512 - (15,451) 5,729,061 1,294, Total exposure 74,524,986 3,139,728 3,541,058 2,916,584 84,122,356 (2,538,782) (2,290,937) 79,292,637 25,346,251 3,899,750 By category of receivable Performing receivables 74,401,778 2,910, ,312,332 - (359,873) 76,952,459 25,211,426 - Of which: forborne 162,611 4, ,261 - (1,559) 165, ,971 - Non-performing receivables 123, ,174 3,541,058 2,916,584 6,810,024 (2,538,782) (1,931,064) 2,340, ,825 3,899,750 Of which: forborne 76, ,340 1,091, ,599 1,408,490 (450,890) (97,924) 859, ,315 1,101,761 Total exposure 74,524,986 3,139,728 3,541,058 2,916,584 84,122,356 (2,538,782) (2,290,937) 79,292,637 25,346,251 3,899,750 71

74 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Loans and Receivables from Customers (Continued) Unimpaired receivables Not due Due Impaired receivables Individualy estimated Collectivity estimated Total gross receivables Аccumulated allowances for impairment Individualy estimated Collectivity estimated Total net receivables Securing unimpaired receivables (In RSD thousand) Value of collateral Securing impaired receivables Retail receivables 30,533,046 1,968, ,739 3,968,152 36,929,092 (264,504) (2,702,948) 33,961,640 11,318,599 1,253,571 Housing loans 11,903, , ,675 1,155,182 14,005,521 (38,572) (183,407) 13,783,542 11,263,197 1,151,481 Consumer and cash loans 17,135,650 1,148, ,594 1,634,499 20,125,480 (200,464) (1,334,781) 18,590,235 55,402 78,245 Transaction loans and credit cards 1,493, ,170 24,968 1,122,244 2,741,155 (24,966) (1,128,533) 1,587, Оther receivables ,227 56,936 (502) (56,227) ,845 Corporate receivables 33,195, ,029 9,315,930 1,067,660 44,483,501 (7,630,451) (498,866) 36,354,184 16,727,879 2,627,243 Large enterprises 16,513, ,118 3,740,957 56,887 20,484,225 (3,341,903) (51,457) 17,090,865 8,094, ,917 Small and medium-sized enterprises 10,860, ,926 3,785, ,369 15,694,411 (2,904,078) (158,306) 12,632,027 5,423,834 1,143,077 Micro enterprises and entrepreneurs 844,795 47, , ,013 2,306,061 (643,545) (256,094) 1,406, , ,889 Farmers 2,651,966 60, ,232 49,391 3,664,036 (731,437) (28,547) 2,904,052 1,700, ,360 Public enterprises 2,325,280-9,488-2,334,768 (9,488) (4,462) 2,320,818 1,381,295 - Receivables from other clients 6,583,050-44, ,627,741 (44,289) (6,000) 6,577, Total exposure 70,311,978 2,872,184 9,819,958 5,036,214 88,040,334 (7,939,244) (3,207,814) 76,893,276 28,046,478 3,880,814 By category of receivable Performing receivables 69,972,470 2,727,247-2,813 72,702,530 - (217,035) 72,485,495 27,833,126 - Of which: forborne 952,549 13, ,540 - (10,761) 955, ,006 - Non-performing receivables 339, ,937 9,819,958 5,033,401 15,337,804 (7,939,244) (2,990,779) 4,407, ,352 3,880,814 Of which: forborne 151, , , ,015 1,051,199 (201,316) (39,071) 810, , ,701 Total exposure 70,311,978 2,872,184 9,819,958 5,036,214 88,040,334 (7,939,244) (3,207,814) 76,893,276 28,046,478 3,880,814 72

75 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Loans and Receivables from Customers (Continued) Changes on impairments: In RSD thousand Impairments at the beginning of the reporting period Impairments within reporting period Reversal of impairments within reporting period Write-offs and sale FX differenc es Impairments at the end of the reporting period Retail receivables 2,967,452 1,489, ,585 1,984,090 (50,083) 1,917,038 Housing loans 221, ,150 40,501 34,128 (16,984) 677,516 Consumer and cash loans 1,535, , ,992 1,230,831 (18,357) 624,950 Transaction loans and credit cards 1,153, , , ,350 (11,730) 613,147 Other receivables 56,729-4,511 47,781 (3,012) 1,425 Corporate receivables 8,129,317 1,726, ,989 6,213,661 (259,720) 2,897,230 Large enterprises 3,393, ,635 64,280 3,022,721 (139,058) 584,936 Small and medium-sized enterprises 3,062, , ,141 1,998,404 (90,187) 1,578,404 Micro enterprises and entrepreneurs 899, ,903 38, ,630 (32,729) 541,791 Farmers 759,984 99,702 25, ,438 (2,523) 183,122 Public enterprises 13,950 5,291 5,573 9,468 4,777 8,977 Receivables from other clients 50,289 10,900 3,800 38,526 (3,412) 15,451 Total exposure 11,147,058 3,226, ,374 8,236,277 (313,215) 4,829,719 By category of receivable Performing receivables 217, , ,609-19, ,873 Of which: forborne 10,761 1,218 10,111 - (309) 1,559 Non-performing receivables 10,930,023 2,937, ,765 8,236,277 (332,586) 4,469,846 Of which: forborne 240, ,306 12,027 20,629 (16,223) 548,814 Total exposure 11,147,058 3,226, ,374 8,236,277 (313,215) 4,829,719 73

76 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Loans and Receivables from Customers (Continued) Impairments at the beginning of the reporting period Impairments within reporting period Reversal of impairments within reporting period Write-offs and sale FX differenc es In RSD thousand Impairments at the end of the reporting period Retail receivables 2,626, ,367 70,150 10,801 59,568 2,967,452 Housing loans 254,971 27,084 14,525 (45,551) 221,979 Consumer and cash loans 1,508, ,299 36,060 5,204 (105,809) 1,535,245 Transaction loans and credit cards 816, ,827 15,804 5, ,626 1,153,499 Other receivables 47,035 14,157 3,761 4 (698) 56,729 Corporate receivables 9,356, , ,329 1,655,360 23,041 8,129,317 Large enterprises 4,331, , ,173 1,011,016 (159,710) 3,393,360 Small and medium-sized enterprises 3,573, ,254 95, ,966 15,492 3,062,384 Micro enterprises and entrepreneurs 695, ,035 39,058 27, , ,639 Farmers 730,979 40,837 19,278 2,648 10, ,984 Public enterprises 25, ,040 - (841) 13,950 Receivables from other clients 48,987 5,786 1,880 - (2,604) 50,289 Total exposure 12,031,983 1,148, ,359 1,666,161 80,005 11,147,058 By category of receivable Performing receivables 246, , ,026 22, ,035 Of which: forborne 3,337 7, ,761 Non-performing receivables 11,785, , ,333 1,666,161 57,660 10,930,023 Of which: forborne 79, ,646 79,690 18, ,387 Total exposure 12,031,983 1,148, ,359 1,666,161 80,005 11,147,058 74

77 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Loans and Receivables from Customers (Continued) Exposure per Industry and geographical concentration: (In RSD thousand) Vojvodina region Performin g receivable s Nonperformi ng receivabl es Belgrade region Performin g receivable s Nonperformi ng receivabl es Sumadija and Western Serbia region Nonperformi Performin g ng receivable receivabl s es Southern and Eastern Serbia region Nonperformi Performin g ng receivable receivabl s es Kosovo and Metohia region Nonperformi Performin g ng receivable receivabl s es Foreign country Performin g receivable s Nonperformi ng receivabl es Retail receivables 15,804, ,888 9,489, ,526 8,755, ,531 3,050, ,970 12,917 1,268 15,033 16,474 Housing loans 4,592, ,689 4,434, ,081 2,982, , ,781 82,633 7,318-14, Consumer and cash loans 10,399, ,533 4,849, ,965 5,436, ,289 2,156,745 94,595 5,311 1, Transaction loans and credit cards 812, , ,349 85, , , ,072 55, ,345 Оther receivables Corporate receivables 12,136,014 2,460,186 15,322, ,504 5,153,496 1,111,212 1,511, , ,841 - Sector А 2,703, ,495 59, ,596 93,388 43,339 4, Sector B, C, Е 6,131, ,162 1,895,531 93,999 3,264, , ,451 45, Sector D 147, , Sector F 736, , ,106 93, ,706 27,279 64,135 9, Sector G 2,012, ,148 5,765, ,032 1,223, , ,581 57, Sector H, I, J 313, ,718 4,869,525 29, ,491 53,703 53,219 9, Sector L, M, N 91,292 25,559 1,556, ,885 13,584 36,691 13,810 11, ,403 - Receivables from other sectors and clients - - 1,588, ,155,804 - Total exposure 27,940,294 3,296,074 26,400,403 1,281,030 13,908,902 1,844,743 4,562, ,436 12,917 1,269 4,487,678 16,474 75

78 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Loans and Receivables from Customers (Continued) (In RSD thousand) Sector А Electricity, gas, steam and air conditioning supply Sector G Wholesale and retail trade, repair of motor vehicles and motorcycles Sector B, C, Е Construction Sector H, I, J Sector D Agriculture, forestry and fishing Sector L, M, N Sector F Vojvodina region Performing receivables Nonperformin g receivable s Mining, Manufacturing, Water supply; sewerage; waste managment and remediation activities Belgrade region Performing receivables Nonperformin g receivable s Sumadija and Western Serbia region Nonperformin Performing g receivables receivable s Southern and Eastern Serbia region Nonperformin Performing g receivables receivable s Kosovo and Metohia region Performing receivables Nonperformin g receivable s Transporting and storage, Accommodation and food service activities, Information and communication Real estate activities, Professional, scientific and technical activities, Administrative and support service activities, Arts Foreign country Performing receivables Nonperformin g receivable s Retail receivables 14,098,697 1,546,015 7,977,220 1,287,883 7,629,850 1,386,504 2,500, ,025 13,814 4,207 14,112 17,892 Housing loans 4,633, ,991 4,104, ,470 2,940, , ,308 67,894 8, , Consumer and cash loans 8,556, ,210 3,660, ,079 4,335, ,301 1,631, ,313 5,460 2, Transaction loans and credit cards 908, , , , , , ,303 99, ,753 Оther receivables 24 4, , , , Corporate receivables 13,967,675 4,091,489 14,691,515 2,963,831 4,074,880 2,159, , ,621-75, , ,786 Sector А 2,416, ,955 14, , ,442 21,839 82, Sector B, C, Е 5,590,315 1,942,993 2,680, ,890 2,178,887 1,122, , ,390-46, ,803 Sector D 1,381, , , Sector F 846, , , , ,314 86,769 36,440 21,097-3, Sector G 3,433, ,068 5,429, ,538 1,153, , , ,005-8, Sector H, I, J 168, ,277 3,180,758 34, ,423 94,905 22,767 9,852-4, Sector L, M, N 131, ,057 2,406,426 1,336,667 36,135 74,315 4,576 15,991-4, ,364 4,983 Receivables from other sectors and clients - - 1,351,136 1,612 9, ,204,859 60,459 Total exposure 28,066,372 5,637,504 24,019,871 4,253,326 11,713,897 3,546,060 3,299, ,152 13,814 79,624 5,589, ,137 76

79 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Loans and Receivables from Customers (Continued) Exposure per sector and category of receivables, impairment status and number of days in past due: Not past due Past due up to 30 days Unimpaired receivables Past due from 31 to 60 days Past due from 61 to 90 days Past due over 90 days Not past due Past due up to 30 days Impaired receivables Past due from 31 to 60 days Past due from 61 to 90 days (In RSD thousand) Past due over 90 days Retail receivables 35,266,900 1,306, , , , ,356,236 Housing loans 12,463, , , ,255-55, ,083,189 Consumer and cash loans 21,410,221 1,085, ,149 97, , ,651 Transaction loans and credit cards 1,392,908 59,323 10,849 4, ,971 Оther receivables ,425 Corporate receivables 33,513, , ,384 23,841 93, ,891-15,990-3,251,517 Large enterprises 11,734, , , ,401 Small and medium-sized enterprises 14,157, , ,566 8,439 93, ,185-15,990-1,755,965 Micro enterprises and entrepreneurs 837,558 65,543 5, ,608 Farmers 3,002,092 25, , ,043 Public enterprises 3,782, ,500 Receivables from other clients 5,744, Total exposure 74,524,985 2,054, , ,991 94, , ,133-5,608,139 By category of receivable Performing receivables 74,401,777 2,020, , , Of which: forborne 162,611 4, Non-performing receivables 123,208 33,511 30,461 70,874 94, , ,133-5,608,139 Of which: forborne 76,270 24,748 16,636 58, , ,024 Total exposure 74,524,985 2,054, , ,991 94, , ,133-5,608,139 77

80 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Loans and Receivables from Customers (Continued) Not past due Past due up to 30 days Past due from 31 to 60 days Past due from 61 to 90 days Unimpaired receivables Past due over 90 days Not past due Past due up to 30 days Impaired receivables Past due from 31 to 60 days Past due from 61 to 90 days (In RSD thousand) Past due over 90 days Retail receivables 30,533,044 1,083, , , ,817 21, ,322,390 Housing loans 11,903, , , ,861-76,980 21, ,284,193 Consumer and cash loans 17,135, , ,891 87, , ,834,563 Transaction loans and credit cards 1,493,772 79,862 13,640 6, ,146,917 Оther receivables ,717 Corporate receivables 33,074,795 1,002,868 21,173 1,075-5,342 2,813 23,165 36,985 10,315,285 Large enterprises 16,407, , ,797,824 Small and medium-sized enterprises 10,859, ,219 15, ,813 23,165-4,184,851 Micro enterprises and entrepreneurs 830,551 55,143 6, ,413,276 Farmers 2,651,966 60, , , ,846 Public enterprises 2,325, ,488 Receivables from other clients 6,583, ,679 Total exposure 70,190,889 2,086, , , ,171 23,941 23,721 36,985 14,682,354 By category of receivable Performing receivables 69,957,298 1,941, , , , Of which: forborne 952,549 5,824 3,511 4, Non-performing receivables 233, ,504 33,972 72, ,171 21,128 23,721 36,985 14,682,354 Of which: forborne 151,649 29,883 23,790 58,435-57,428-23,165 36, ,864 Total exposure 70,190,889 2,086, , , ,171 23,941 23,721 36,985 14,682,354 78

81 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Loans and Receivables from Customers (Continued) Non-performing receivables: Gross value of total receivables Accumulated allowances for impairment of total receivables Gross value of nonperforming receivables Of which: forborne receivables Accumulated allowances for impairment of nonperforming receivables % of nonperformin g receivable s (In RSD thousand) Value of collateral securing nonperforming receivables* Retail receivables 39,754,281 (1,917,038) 2,626, ,745 (1,652,628) 6.61% 1,076,876 Housing loans 14,080,909 (677,516) 1,263, ,745 (585,768) 8.97% 1,065,849 Consumer and cash loans 23,602,443 (624,950) 754,641 74,000 (464,767) 3.20% 11,026 Transaction loans and credit cards 2,069,503 (613,147) 606,876 - (600,668) 29.32% - Оther receivables 1,426 (1,425) 1,426 - (1,425) % 1 Corporate receivables 38,623,563 (2,897,230) 4,182,981 1,120,745 (2,817,036) 10.83% 2,957,313 Sector А 3,305,736 (185,812) 288,202 95,098 (177,366) 8.72% 222,210 Sector B, C, Е 13,378,574 (1,167,971) 1,422, ,050 (1,141,625) 10.63% 997,273 Sector D 405,189 (1,421) (297) 0.16% - Sector F 2,424,949 (400,150) 437, ,578 (385,897) 18.06% 338,220 Sector G 11,075,604 (716,377) 1,401, ,900 (699,749) 12.66% 988,455 Sector H, I, J 5,837,010 (366,520) 427,358 7,119 (360,491) 7.32% 340,891 Sector L, M, N 2,196,501 (58,979) 204,467 - (51,611) 9.31% 70,264 Receivables from other sectors and clients 5,744,512 (15,451) (182) 0.01% 386 Total exposure 84,122,356 (4,829,719) 6,810,024 1,408,490 (4,469,846) 8.10% 4,034,575 79

82 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Loans and Receivables from Customers (Continued) (In RSD thousand) Gross value of total receivables Accumulated allowances for impairment of total receivables Gross value of nonperforming receivables Of which: forborne receivables Accumulated allowances for impairment of nonperforming receivables % of nonperformin g receivable s Value of collateral securing nonperforming receivables* Retail receivables 36,929,092 (2,967,452) 4,694, ,272 (2,855,958) 12.71% 1,392,633 Housing loans 14,005,521 (221,979) 1,547, ,702 (194,894) 11.05% 1,290,134 Consumer and cash loans 20,125,480 (1,535,245) 1,935,345 85,570 (1,464,817) 9.62% 78,654 Transaction loans and credit cards 2,741,155 (1,153,499) 1,154,529 - (1,139,518) 42.12% - Оther receivables 56,936 (56,729) 56,883 - (56,729) 99.91% 23,845 Corporate receivables 44,483,501 (8,129,317) 10,580, ,927 (8,029,488) 23.79% 2,701,533 Sector А 3,686,984 (763,320) 975,962 59,842 (759,470) 26.47% 181,646 Sector B, C, Е 15,650,723 (3,867,861) 4,821, ,844 (3,846,130) 30.81% 1,520,033 Sector D 1,736,558 (11,839) 7,896 - (7,487) 0.45% - Sector F 2,493,448 (468,031) 681, ,592 (446,495) 27.33% 381,003 Sector G 12,305,012 (1,410,161) 1,956,134 1,567 (1,380,486) 15.90% 473,023 Sector H, I, J 4,076,994 (274,038) 552,708 7,573 (270,461) 13.56% 72,646 Sector L, M, N 4,533,782 (1,334,067) 1,584,543 60,509 (1,318,959) 34.95% 73,182 Receivables from other sectors and clients 6,627,741 (50,289) 62,579 - (44,577) 0.94% - Total exposure 88,040,334 (11,147,058) 15,337,804 1,051,199 (10,930,023) 17.42% 4,094,166 80

83 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Loans and Receivables from Customers (Continued) Changes in non-performing receivables: Gross value at the start of the year New non-performing receivables Of which: purchase d Decrease in non-performing receivables Of which: collected Of which : sold Of which: written off Excha nge rate eff Other changes* Gross value at yearend (In RSD thousand) Net value at year-end Retail receivables 4,694, ,208-2,217, ,251-2,025,012 (130,967) (244,845) 2,626, ,029 Housing loans 1,547, ,323-97,554 63,828-33,725 (128,376) (255,448) 1,263, ,946 Consumer and cash loans 1,935, ,620-1,371,134 58,806-1,312,327 (1,648) (104,542) 754, ,874 Transaction loans and credit cards 1,154,529 29, ,343 68, ,835 (943) 115, ,876 6,208 Оther receivables 56,883 1,425-56,234 1,109-55,125 - (648) 1,426 1 Corporate receivables 10,580, ,262-7,042, ,000-6,174,004 (102,532) 92,557 4,182,981 1,365,945 Large enterprises 3,904, ,900-3,350, ,684-3,015,223 (17,338) (92,370) 1,049, ,346 Small and medium-sized enterprises 4,273,381 25,476-2,396, ,778-1,975,035 (58,041) 165,430 2,009, ,366 Micro enterprises and entrepreneurs 1,424,447 22, ,882 90, ,027 (20,817) 11, , ,383 Farmers 969, ,914 19, ,231 (6,336) , ,850 Public enterprises 9, , ,488-7,500 7,500 - Receivables from other clients 62, ,288 2,674-41,615 - (17,904) Total exposure 15,337,804 1,179,470-9,303,558 1,062,925-8,240,631 (233,499) (170,192) 6,810,024 2,340,178 81

84 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Loans and Receivables from Customers (Continued) Gross value at the start of the year New non-performing receivables Decrease in non-performing receivables Excha Of which: purcha sed Of which: collected Of which: sold Of which: written off nge rate eff Other changes* Gross value at yearend (In RSD thousand) Net value at year-end Retail receivables 4,428, , , ,629-8,569 43,034 (95,765) 4,694,526 1,838,568 Housing loans 1,484, ,594-88,613 88, ,566 (171,367) 1,547,769 1,352,875 Consumer and cash loans 1,820, , , ,523-4,697 17,019 (45,112) 1,935, ,528 Transaction loans and credit cards 1,061,315 41,588-69,680 65,812-3, ,716 1,154,529 15,011 Оther receivables 62, ,685 6, (2) 56, Corporate receivables 12,569, ,584-2,811,948 1,203,962-1,607, ,200 (44,604) 10,580,699 2,551,211 Large enterprises 4,894, ,369-1,571, , ,943 47, ,904, ,650 Small and medium-sized enterprises 5,182, ,944-1,018, , ,980 55,266 (54,734) 4,273,381 1,248,366 Micro enterprises and entrepreneurs 1,448,872 27,341-73,528 45,092-28,436 13,387 8,375 1,424, ,026 Farmers 1,034,056 68, , ,204-2,627 13,558 1, , ,169 Public enterprises 9, ,488 0 Receivables from other clients 52,222-10,357 62,579 18,002 Total exposure 17,050,556 1,370,172-3,126,146 1,509,591-1,616, ,234 (130,012) 15,337,804 4,407,781 82

85 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Quality of Loans and Advances to Customers neither Past Due nor Impaired The portfolio lending quality is monitored based on several credit risk indicators. In case of retail portfolio (mortgages, consumer loans and credit cards), the number of days past due is the key indicator based on which the type of necessary activities is determined. Indicators used dominantly for monitoring small business and corporate clients are number of days past due, internal classification and credit rating. Credit ratings reflect the possibility of occurrence of the status of default of clients, in the manner that clients classified as Good have the least, Satisfactory have the medium, and Watch the highest possibility of being in default Credit quality of performing receivables High Medium Low Non-performing receivables Securing performing receivables Value of collateral (In RSD thousand) Securing non-performing receivables Retail receivables 36,453, , ,298 2,626,657 11,287,159 1,076,876 Housing loans 12,565, ,081 83,288 1,263,714 11,227,150 1,065,849 Consumer and cash loans 22,439, ,482 89, ,641 60,009 11,026 Transaction loans and credit cards 1,447,807 10,382 4, , Оther receivables ,426-1 Corporate receivables 23,061,517 10,097,911 1,281,154 4,182,981 12,630,133 2,957,313 Large enterprises 8,863,052 2,872,161 14,587 1,049,302 3,224, ,201 Small and medium-sized enterprises 9,065,628 4,944, ,785 2,009,433 7,471,193 1,381,205 Micro enterprises and entrepreneurs 338, ,606 61, , , ,050 Farmers 1,499,516 1,443,596 68, ,542 1,543, ,357 Public enterprises 3,294, , ,885 7, ,938 7,500 Receivables from other clients 5,225, , ,294, Total exposure 64,739,922 11,113,958 1,458,452 6,810,024 25,211,426 4,034,575 83

86 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Quality of Loans and Advances to Customers neither Past Due nor Impaired (Continued) (In RSD thousand) Credit quality of performing receivables High Medium Low Non-performing receivables Securing performing receivables Value of collateral Securing non-performing receivables Retail receivables 31,448, , ,424 4,694,526 11,179,537 1,392,633 Housing loans 12,001, , ,965 1,547,769 11,124,544 1,290,134 Consumer and cash loans 17,878, ,262 81,600 1,935,345 54,993 78,654 Transaction loans and credit cards 1,568,041 12,725 5,859 1,154, Оther receivables ,883-23,845 Corporate receivables 11,580,090 18,505,543 3,817,170 10,580,699 16,653,589 2,701,533 Large enterprises 3,730,468 9,750,528 3,099,517 3,904,018 8,094, ,917 Small and medium-sized enterprises 5,572,920 5,198, ,751 4,273,381 5,368,861 1,198,049 Micro enterprises and entrepreneurs 323, ,175 41,879 1,424, , ,500 Farmers 1,356,126 1,312,521 26, ,365 1,682, ,067 Public enterprises 597,323 1,727,957-9,488 1,381,295 - Receivables from other clients 5,552,218 1,003,778 9,166 62, Total exposure 48,580,639 19,997,131 4,124,760 15,337,804 27,833,126 4,094,166 84

87 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Quality of Loans and Advances to Customers neither Past Due nor Impaired (Continued) Structure of loans and advances that are not due nor impaired as of 31.December 2017 and 31. December 2016 are presented in following tables: (In RSD thousand) Loans to be repaid Loans to be monitored Loans below the average Loans are suspicious Bad loans The value of collateral Retail receivables 35,266, ,975,946 Housing loans 12,463, ,918,102 Consumer and cash loans 21,410, ,844 Transaction loans and credit cards 1,392, Оther receivables Corporate receivables 33,498,556 3,301 2, ,502 12,170,954 Large enterprises 11,734, ,210,027 Small and medium-sized enterprises 14,143,214 2,374 2,593-9,489 7,037,806 Micro enterprises and entrepreneurs 836, ,216 Farmers 3,002, ,533,967 Public enterprises 3,782, ,938 Receivables from other clients 5,744, ,294,134 Total exposure 74,509,583 3,301 2, ,502 24,441, Loans to be repaid Loans to be monitored Loans below the average Loans are suspicious Bad loans (In RSD thousand) The value of collateral Retail receivables 30,533, ,662,677 Housing loans 11,903, ,622,347 Consumer and cash loans 17,135, ,330 Transaction loans and credit cards 1,493, Оther receivables Corporate receivables 32,942, ,141 57, ,253,031 Large enterprises 16,407, , ,038,258 Small and medium-sized enterprises 10,724,920 78,308 57, ,039,366 Micro enterprises and entrepreneurs 832,819 11, ,559 Farmers 2,651, ,672,553 Public enterprises 2,325, ,381,295 Receivables from other clients 6,583, Total exposure 70,058, ,141 57, ,915,708 85

88 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Quality of Loans and Advances to Customers that are Past Due but not Impaired Loans and advances to customers that are due but not impaired per days of delinquency are presented in tables below: (In RSD thousand) Due 0 days Due from 1-30 days Due from days Due from days Due from days Due from days Due from 1-5 years Due over 5 year The value of collateral Retail receivables - 1,306, , , ,618 Housing loans - 161, , , ,452 Consumer and cash loans - 1,085, ,149 97, ,165 Transaction loans and credit cards - 59,323 10,849 4, Оther receivables Corporate receivables - 748, ,384 23, , ,599 Large enterprises , ,587 Small and medium-sized enterprises - 656, ,566 8, , ,474 Micro enterprises and entrepreneurs - 65,543 5, ,950 Farmers - 25, ,588 Public enterprises Receivables from other clients Total exposure - 2,054, , , , ,217 86

89 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Quality of Loans and Advances to Customers that are Past Due but not Impaired (Continued) Due 0 days Due from 1-30 days Due from days Due from days Due from days Due from days Due from 1-5 years Due over 5 year (In RSD thousand) The value of collateral Retail receivables - 1,083, , , ,922 Housing loans - 183, , , ,850 Consumer and cash loans - 819, ,891 87, ,072 Transaction loans and credit cards - 79,861 13,640 6, Оther receivables Corporate receivables - 881,889 21,065 1, ,848 Large enterprises - 173, ,120 Small and medium-sized enterprises - 607,317 15, ,468 Micro enterprises and entrepreneurs - 41,007 6, ,408 Farmers - 60, ,852 Public enterprises Receivables from other clients Total exposure - 1,965, , , ,130,770 87

90 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Impaired Loans Impaired loans comprise: Loans for which the impairment amount is determined by assessment on individual basis, and Loans for which impairment assessment is performed on collective basis and where the client is in default in connection with interest, principal or other basis over 90 days. In following tables are presented changes in impaired loans: Gross value at the start of the year Loans impaired during the year Of which: individually estimated as impaired Loans which exited the impaired category during the year Of which: previously individually estimated as impaired Exchange rate effect Other changes* Gross value at end of period (in RSD thousand) Net value at end of period Retail receivables 4,427, ,661 19,854 2,399, ,825 (114,555) (9,956) 2,416, ,884 Housing loans 1,382, ,993 19, ,167 12,975 (112,022) (114,513) 1,139, ,634 Consumer and cash loans 1,841, , ,410, ,022 (1,590) (28,331) 675, ,544 Тransaction loans and credit cards 1,147,212 26, ,580 3,824 (943) 133, , Оther receivables 56,729 1,425-56, (498) 1,425 - Corporate receivables 10,383, , ,921 6,990,342 6,766,257 (101,618) 124,593 4,040,398 1,232,298 Large enterprises 3,797, , ,900 3,339,953 3,283,354 (17,338) 2,848 1,049, ,346 Small and medium-sized enterprises 4,210,907 5, ,369,019 2,288,709 (57,790) 105,265 1,895, ,459 Micro enterprises and entrepreneurs 1,413,728 12, , ,118 (20,817) 8, , ,932 Farmers 951, , ,588 (5,673) ,821 99,561 Public enterprises 9, ,488 9,488-7,500 7,500 - Receivables from other clients 44, ,613 41,613 - (2,692) Total receivables 14,856,172 1,136, ,775 9,431,138 7,024,695 (216,173) 111,945 6,457,642 2,012,386 88

91 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Impaired Loans (Continued) Gross value at the start of the year Loans impaired during the year Of which: individually estimated as impaired Loans which exited the impaired category during the year Of which: previously individually estimated as impaired Exchange rate effect Other changes* Gross value at end of period (in RSD thousand) Net value at end of period Retail receivables 3,883, ,063 88, ,166 53,514 35,265 1,640 4,427,891 1,577,668 Housing loans 1,032, ,927 81, ,981 49,813 16,895 (48,793) 1,382,857 1,191,447 Consumer and cash loans 1,735, ,038 7, ,847 3,340 16,921 (51,555) 1,841, ,178 Тransaction loans and credit cards 1,052,198 51, , ,422 1,147,212 8,043 Оther receivables 62, , (3,434) 56,729 - Corporate receivables 11,189,318 1,416, ,967 (2,339,503) 10,383,590 2,354,617 Large enterprises 4,486, , ,345 (1,337,953) 3,797, ,133 Small and medium-sized enterprises 4,437, , ,387 (849,282) 4,210,907 1,191,045 Micro enterprises and entrepreneurs 1,408,581 60, ,790 (68,180) 1,413, ,597 Farmers 847, , ,445 (84,088) 951, ,842 Public enterprises 9, ,488 - Receivables from other clients 51, (6,891) 44, Total receivables 15,123,989 2,253,129 88, ,424 53, ,232 (2,344,754) 14,856,172 3,932,494 89

92 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Termination of Impairment Status If there is objective evidence indicating that the status of impaired loan is no longer justified for individual exposure, such exposure is no longer presented as impaired. For example, corporate loans which are assessed on individual basis cease to be in the status of impaired loans upon improvement of the client s financial position up to the level that full settlement of liabilities is reasonably expected from such client. Retail impaired loans are monitored based on effected payments, i.e. they cease to be in the status of impaired loans in the moment of payment of the full due amount. Restructured Loans Restructured loans are loans where modification of agreed terms and conditions of repayment or refinancing of previously approved loans took place, where this modification was performed due to deterioration in financial condition of debtor, with the purpose of maximizing Bank s probability of collection. 90

93 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Restructured Loans (Continued) Summary of restructured loans to customers as of 31 December 2017 and 2016, including the data on restructuring instruments applied, as well as on reasons for change in the level of restructured loans, are presented in the following tables: Gross value of total receivables Аccumulated allowances for impairment of total receivables Gross value of forborne receivables Of which: nonperforming receivables Аccumulated allowances for impairment of forborne receivables % of forborne receivables (in RSD thousand) Value of collateral securing forborne receivables* Retail receivables 39,754,281 (1,917,038) 455, ,745 (86,864) 1.14% 297,044 Housing loans 14,080,909 (677,516) 342, ,745 (68,042) 2.43% 297,044 Consumer and cash loans 23,602,443 (624,950) 112,867 74,000 (18,822) 0.48% - Тransaction loans and credit cards 2,069,503 (613,147) % - Оther receivables 1,426 (1,425) % - Corporate receivables 38,623,563 (2,897,230) 1,120,746 1,120,744 (463,509) 2.90% 1,034,003 Sector A 3,305,736 (185,812) 95,098 95,098 (20,632) 2.88% 86,019 Sectors B, C and E 13,378,576 (1,167,971) 135, ,050 (12,325) 1.01% 131,215 Sector D 405,190 (1,421) % - Sector F 2,424,948 (400,150) 277, ,577 (268,599) 11.45% 210,869 Sector G 11,075,604 (716,377) 605, ,900 (158,588) 5.47% 605,900 Sectors H, I and J 5,837,009 (366,520) 7,119 7,119 (3,365) 0.12% - Sectors L, M and N 2,196,500 (58,979) % - Receivables from other sectors and clients 5,744,512 (15,451) % - Total receivables 84,122,356 (4,829,719) 1,575,751 1,408,489 (550,373) 1.87% 1,331,047 91

94 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Restructured Loans (Continued) Gross value of total receivables Аccumulated allowances for impairment of total receivables Gross value of forborne receivables Of which: nonperforming receivables Аccumulated allowances for impairment of forborne receivables % of forborne receivables Value of collateral securing forborne receivables* Retail receivables 36,929,092 (2,967,452) 697, ,272 (28,907) 1.89% 479,308 Housing loans 14,005,521 (221,979) 576, ,702 (20,485) 4.11% 479,308 Consumer and cash loans 20,125,480 (1,535,245) 121,548 85,570 (8,422) 0.60% - Тransaction loans and credit cards 2,741,155 (1,153,499) % - Оther receivables 56,936 (56,729) % - Corporate receivables 44,483,501 (8,129,317) 1,320, ,926 (222,241) 2.97% 1,200,658 Sector A 3,686,986 (763,320) 59,842 59,842 (9,049) 1.62% 49,519 Sectors B, C and E 15,650,722 (3,867,861) 195, ,844 (10,512) 1.25% 156,033 Sector D 1,736,558 (11,839) % - Sector F 2,493,449 (468,031) 312, ,591 (182,706) 12.54% 255,298 Sector G 12,305,011 (1,410,161) 683,522 1,567 (10,014) 5.55% 683,520 Sectors H, I and J 4,076,994 (274,038) 7,573 7,573 (3,580) 0.19% - Sectors L, M and N 4,533,781 (1,334,067) 60,509 60,509 (6,380) 1.33% 56,288 Receivables from other sectors and clients 6,627,741 (50,289) % - Total receivables 88,040,334 (11,147,058) 2,017,739 1,051,198 (251,148) 2.29% 1,679,966 (in RSD thousand) 92

95 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Restructured Loans (Continued) In tables below are presented changes in restructured loans: (in RSD thousand) Gross value at the start of the period Receivables forborne during the period Receivables which exited the forbearance category during the period Exchange rate effect Other changes* Gross value at year-end Net value at year-end Retail receivables 697,730 86, ,258 (35,381) (27,291) 455, ,141 Housing loans 576,182 54, ,522 (35,381) (18,020) 342, ,096 Consumer and cash loans 121,548 31,326 30,736 - (9,271) 112,867 94,045 Corporate receivables 1,320,009 43,779 97,682 (35,662) (109,698) 1,120, ,237 Large enterprises 1,004,665-33,421 (23,485) (64,281) 883, ,291 Small and medium-sized enterprises 255,317-59,314 (10,011) (43,822) 142, ,480 Micro enterprises and entrepreneurs Farmers 59,843 43,779 4,763 (2,166) (1,595) 95,098 74,466 Public enterprises Receivables from other clients Total receivables 2,017, , ,940 (71,043) (136,989) 1,575,751 1,025,378 93

96 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Restructured Loans (Continued) (in RSD thousand) Gross value at the start of the period Receivables forborne during the period Receivables which exited the forbearance category during the period Exchange rate effect Other changes* Gross value at year-end Net value at year-end Retail receivables 638, ,866 69,476 9,847 (27,133) 697, ,823 Housing loans 557,405 84,872 56,224 9,847 (19,718) 576, ,697 Consumer and cash loans 81,221 60,994 13,252 - (7,415) 121, ,126 Corporate receivables 2,710,729 65,486 1,316,900 13,514 (152,820) 1,320,009 1,097,768 Large enterprises 2,220, ,173,990 9,854 (52,178) 1,004, ,981 Small and medium-sized enterprises 469,529 23, ,910 3,389 (97,856) 255, ,897 Micro enterprises and entrepreneurs (2) Farmers 20,607 41, (2,784) 59,843 50,793 Public enterprises Receivables from other clients Total receivables 3,349, ,352 1,386,376 23,361 (179,953) 2,017,739 1,766,591 94

97 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Restructured Loans (Continued) Structure of restructured loans per restructuring measures are presented in following tables: Interest rate reduction Loan term extension Moratorium Capitalisation of arrears Refinancing Partial write-off Debt to equity conversion (Gross value in RSD thousand) Other measures Total Retailreceivables 82, ,923-26, , ,005 Housingloans 78, ,107-26, , ,138 Consumerandcashloans 4, , ,867 Тransactionloansandcreditcards Оtherreceivables Corporatereceivables 605, , ,732-43,779 1,120,746 Largeenterprises 605, , ,478 Smallandmedium-sizedenterprises - 138, , ,170 Microenterprisesandentrepreneurs Farmers - 51, ,779 95,098 Publicenterprises Receivablesfromotherclients Totalreceivables 688, ,257-26, ,732-98,700 1,575,751 95

98 43. Risk Management (Continued) 43.2 Credit Risk (Continued) Restructured Loans (Continued) Interest rate reduction Loan term extension Moratorium Capitalisation of arrears Refinancing Partial write-off Debt to equity conversion Other measures* Total Retailreceivables 103, ,836-29, , ,730 Housingloans 97, ,025-29, , ,182 Consumerandcashloans 6, , ,548 Тransactionloansandcreditcards Оtherreceivables Corporatereceivables 702, , , ,320,009 Largeenterprises 702, , ,004,665 Smallandmedium-sizedenterprises - 251, , ,317 Microenterprisesandentrepreneurs Farmers - 59, ,843 Publicenterprises Receivablesfromotherclients Totalreceivables 805,941 1,110,031-29,320-3,732-68,715 2,017,739 96

99 43. Risk Management (Continued) 43.3 Market Risk Market risk is the existing or future risk of the occurrence of adverse effects on the Bank s financial result and capital due to changes of interest rates, price of equity securities, price of traded or tradable goods and exchange rates. The most important from the group of market risks in the Bank s operation is foreign exchange risk and interest rate risk. Foreign exchange risk is the existing or future risk of the occurrence of adverse effects on the Bank s financial result and capital due to unfavourable exchange rate fluctuations in the banking book and trading book. Interest rate risk is the existing or future risk of the occurrence of adverse effects on the Bank s financial result and capital due to modifications in the direction or volatility of interest rates, shape of the yield curve and margin between different interest rates that affect positions in the trading book. The Bank has established and maintains corresponding market risk measuring, monitoring and controlling functions, including: Market risk measurement processes which record all significant sources of market risk and assess the impact of market risk factor changes in the manner in line with the Bank s scope of activities. These measurement systems include VaR models for the most important currencies and models where appropriate; Operational limits and other practices which ensure that exposures remain within levels that are in accordance with internal policies in terms of exposure to individual market risk types, positions and loss limits; Measurement of sensitivity to loss under stressed market conditions and taking into account such results when establishing and reviewing policies and limits for market risks; and Adequate and efficient processes and information systems for measuring, monitoring, controlling and reporting on market risk exposure. Controls (limits) are included in those systems. Reports are regularly made and submitted to the Board of Directors, Executive Board, ALCO Committee and all other corresponding competent bodies Interest Rate Risk The Bank is exposed to interest risk based on items from banking book. The level of such risk is assessed as a whole and for each significant currency for definition of which there is established criteria. In accordance with these criteria, the Bank is of the opinion that RSD, EUR, USD and CHF are significant currencies. The basic instrument of interest rate risk management is to monitor mismatch of interest sensitive assets and liabilities and based on determining the impacts of changes to the interest rates on the changes of net interest income and economic value of capital. The acceptable interest rate risk level is defined by limits of mismatch of interest sensitive assets and liabilities. The Market Risk Management Department within the Risk Management Division monitors interest rate risk and reports thereof to the Assets and Liabilities Committee, which is responsible for maintaining exposure to the interest rate risk within adopted limits and it proposes to the Bank s Executive Board the measures and activities necessary to adjust such exposure with limits. 97

100 43. Risk Management (Continued) 43.3 Market Risk (Continued) Interest Rate Risk (Continued) The following table presents the mismatch of interest sensitive assets and liabilities, i.e., the Bank s exposure to the risk of changes in interest rates as of 31 December Table includes the Bank s monetary assets and liabilities at their carrying value and initially agreed term of re-modification to the interest rate or due date. In RSD thousand Up to 1 month From 1 to 3 months From 3 to 12 months Over 1 year Non interest bearing Total ASSETS Cash and balances with central banks 9,079, ,337,301 21,416,477 Financial assets at FV through profit and loss held-for-trading 23,734 15, ,569 Financial assets available-for-sale 26,064 2,955,585 1,917,915 11,278,068 90,829 16,268,461 Financial assets held-to-maturity 53,196 5, ,186 Loans and receivables from banks and 3,804,730-77,007 38,214 1,809,107 5,729,058 other financial organizations Loans and receivables from customers 22,414,172 37,632,783 4,635,107 8,564, ,575 73,504,393 Other assets , ,160 TOTAL ASSETS 35,401,072 40,610,193 6,630,029 19,881,039 15,010, ,533,304 LIABILITIES Financial liabilities at FV through profit 17, ,392 and loss held-for-trading Deposits and other liabilities to banks, 4,814,860-1,000-1,214,248 6,030,108 other financial organizations and central bank Deposits and other liabilities to other 40,058,868 5,548,352 20,208,318 1,425,868 29,908,199 97,149,605 customers Other liabilities , ,272 TOTAL LIABILITIES 44,891,523 5,548,352 20,209,318 1,425,868 31,709, ,784,377 Net exposure to interest rate risk as of: 31 December 2017 ( 9,490,451) 35,061,841 ( 13,579,289) 18,455,171 ( 16,698,344) 13,748, December 2016 (10,887,393) 23,353,218 (14,172,583) 24,019,393 (7,448,905) 14,863,730 Interest rate risk is also monitored according to the scenario analysis, i.e. by observing the impact of interest rate changes to the Bank s revenue and expenditures, as shown in the table as follows: In RSD thousand Change in percentage point Sensitivity of Income statement Change in percentage point Sensitivity of Income statement Increase of percentage point + 1% 307, % 225,380 Decrease of percentage point -1% ( 301,458) -1% ( 220,917) 98

101 43. Risk Management (Continued) 43.3 Market Risk (Continued) Foreign Exchange Risk The Bank manages foreign exchange risk by limiting and daily monitoring of alignment of that position with the limit. In addition to this, the Bank measures on a daily basis the foreign exchange risk indicator pursuant to the regulations of the National Bank of Serbia and maintains it within the prescribed limits. Foreign exchange risk indicator is the ratio between the open FX position and Bank s capital calculated pursuant to the regulations governing capital adequacy. The Bank has set and maintains corresponding foreign exchange risk measuring, monitoring and controlling functions, including an application enabling the monitoring of the open FX position both on a daily basis and during the day. The Bank s exposure to foreign exchange risk, i.e. open FX position as of 31 December 2017 is presented in the following tables. Other currencies In RSD thousand Total foreign currencies RSD Total EUR USD ASSETS Cash and balances with central banks 9,095, , ,236 10,025,065 11,391,412 21,416,477 Financial assets at FV through profit ,569 39,569 and loss held-for-trading Financial assets available-for-sale 9,024, ,024,243 7,244,218 16,268,461 Financial assets held-to-maturity - 59,186 59,186 Loans and receivables from banks 3,750,230 1,154, ,671 5,498, ,677 5,729,058 and other financial organizations Loans and receivables from 37,217, ,940 3,541,102 41,357,214 32,147,179 73,504,393 customers Other assets 6,184 5, , , ,160 TOTAL ASSETS 59,092,895 2,106,665 4,717,019 65,916,579 51,616, ,533,304 LIABILITIES Financial liabilities at FV through profit ,392 17,392 and loss held-for-trading Deposits and other liabilities to banks, 5,108, ,112 7,814 5,775, ,670 6,030,108 other financial organizations and central bank Deposits and other liabilities to other 54,511,455 2,137,888 2,431,066 59,080,409 38,069,196 97,149,605 customers Other liabilities 74, ,684 79, , ,272 TOTAL LIABILITIES 59,694,071 2,797,932 2,443,564 64,935,567 38,848, ,784,377 Forward and spot position 409, ,667 (2,234,181) (1,142,511) 1,171,923 29,412 Net open position as of: 31 December 2017 (192,173) (8,600) 39,274 (161,499) 13,939,838 13,778, December ,000,227 (16,298) (822) 983,107 13,907,223 14,890,330 Sensitivity analysis of financial assets and liabilities on 31 December 2017 provides two scenarios which are prepared based on assumed potential exchange rate differences, when all other variable components remain permanent and shows potential impacts on the Bank s financial result. Proportionate exchange rate differences from +10% (currency depreciation); Proportionate exchange rate differences from -10 % (dinar depreciation). 99

102 43. Risk Management (Continued) 43.3 Market Risk (Continued) Foreign Exchange Risk (Continued) In RSD thousand Change in exchange rate Total 10% -10% ASSETS Cash and balances with central banks 10,025,065 1,113,896 (911,370) Financial assets available-for-sale 9,024,243 1,002,694 (820,386) Loans and receivables from banks and other financial organizations 5,498, ,931 (499,853) Loans and receivables from customers 41,357,214 4,595,246 (3,759,747) Other assets 11,676 1,297 (1,061) TOTAL ASSETS 65,916,579 7,324,064 (5,992,417) LIABILITIES Deposits and other liabilities to banks, other financial organizations and central bank 5,775, ,715 (525,040) Deposits and other liabilities to other customers 59,080,409 6,564,490 (5,370,946) Other liabilities 79,720 8,858 (7,247) TOTAL LIABILITIES 64,935,567 7,215,063 (5,903,233) Net exposure to foreign exchange risk as of: 31 December ,001 ( 89,183) 31 December ,186 ( 240,696) 43.4 Country Risk Country risk is the possibility of the occurrence of adverse effects on the financial result and capital due to events in a certain country which are at least to some extent under the control of the central government, but beyond the control of natural persons or private corporate entities. Such events include: deterioration of economic conditions, political or social riots, nationalization and expropriation, as well as decline or devaluation of the national currency, deterioration of usual market conditions. The Bank is exposed to this type of risk based on all cross-border funding in a certain country, whether to the central government, bank, private company or natural person. Country risk in the Bank s operation arises to the greatest extent in connection with interbank placements. The Bank manages country risk by the establishment of a system of exposure limits in connection with country risk and by the regular calculation of the provision for country risk Liquidity Risk Liquidity risk is the possibility of the occurrence of adverse effects on the Bank s financial result and capital due to its inability to perform its due liabilities without making unacceptable losses. Liquidity risk stems from the maturity mismatch of income and outflow, including unexpected delays in collection (risk of payment mismatch), as well as unexpectedly high outflows (risk of unexpected outflows), and in connection with structure illiquidity, i.e., unexpected increase of costs for funding placements or the Bank s inability to convert certain types of property into cash timely and at a reasonable price. 100

103 43. Risk Management (Continued) 43.5 Liquidity Risk (Continued) The Bank has set the framework for liquidity risk management by the Policy for Liquidity Risk Management defining roles and responsibilities in the liquidity management process, with the aim of providing various sources of financing, corresponding management of the assets and liabilities structure and constant monitoring of future cash flows and liquidity on a daily basis. The Bank estimates on a daily basis the expected cash flows in dinars and in foreign currencies and the availability of assets which can be used as collateral for the purpose of ensuring additional financing if needed. The Bank manages its assets and liabilities in the manner that enables the Bank to always settle its due liabilities and timely meet its financial obligations. The Bank s framework for liquidity risk management includes: Operational standards with reference to liquidity risk, including corresponding policies, procedures and resources for controlling, limiting liquidity risk and its management; Maintaining the inventory of liquid assets pursuant to the cash flow profile which can if necessary be converted into cash without unnecessary losses to capital; Managing access to sources of financing and measuring, controlling and testing the funding request scenarios. MIS and other systems which identify, measure, monitor and control liquidity risk; Business Contingency Plans to manage disturbances in liquidity in terms of the possibility that some or all activities are financed timely and with reasonable costs; and Liquidity risk limits (maturity mismatch indicator, liquid assets indicator), taking into account existing regulatory frameworks. The Bank has established and maintains adequate functions for liquidity measurement, monitoring and controlling, as well as for reporting which relate to: Cash flow maturity profile within different scenarios and testing, including scenario for assets and liabilities without maturity; Inventory of liquid assets available to the institution at their market value; The Bank s ability to sell assets at various markets (primarily in unfavourable conditions) and take loans on markets; Potential volatility sources of assets and liabilities (including receivables and obligations stemming from the Bank s off-balance sheet operations); Impact of the unfavourable quality trends of assets on future cash flows and market reliability at the Bank s level; Creditworthiness and capacity of persons ensuring stand-by placements to meet their obligations; Impact of the deterioration of market conditions on cash flows and clients; Types of new deposits being obtained, as well as their source, maturity and price; and Requests for regulatory reporting. The Market Risk Management Department within the Risk Management Division is responsible for monitoring liquidity risk. Daily liquidity management is performed in the Treasury Division. The Assets and Liabilities Management may recommend to the Executive Board measures and activities for improvement of the maturity structure and other measures necessary for better liquidity management The Bank calculates and maintains the liquidity indicators aligned on a daily basis as prescribed by the National Bank of Serbia, namely liquidity ratio and narrow liquidity ratio. Also, the Bank calculates and maintains on a monthly basis liquidity coverage ratio as prescribed by NBS. Liquidity ratio represents the ratio of the sum of prescribed types of liquid assets and sum of certain types of liabilities, and measures the Bank s liquidity within a time frame of one month.during 2017 and 2016 the indicator of the Bank s daily liquidity was in average significantly above the level prescribed by the National Bank of Serbia. 101

104 43. Risk Management (Continued) 43.5 Liquidity Risk (Continued) During 2017 and 2016 the liquidity indicators were as follows: Average during the period Highest Lowest As of 31 December Liquidity coverage ratio was introduced in local regulatory framework starting from 30 June 2017 and represents extent to which liquid assets cover net outflows assessed under stressed circumstances for the period of 30 days from the measurement date. As the previously described indicator, in the second half of 2017 (i.e. since its introduction) this ratio of Bank s liquidity was significantly above prescribed minimum of 100% and on 31 December 2017 it was calculated on the level of 179,31%. The Bank manages liquidity risk by continuous monitoring of maturity mismatch of assets and liabilities positions and by establishing a limit to the mismatch amount per maturity categories. The Bank s management is of the opinion that diversification of deposits according to the type of placed deposits and the number of clients, as well as according to historical experience of the Bank, provides an adequate guarantee that its deposits are stable and reliable source of financing. The maturity structure of Bank s assets and liabilities as of 31 December 2017 is presented in the following table. The table presents the remaining maturity of financial instruments stated at their book value at the balance sheet date, and maturity categories are presented according to the contracted, without including assumptions on expected maturity. Up to 1 month From 1 to 3 months From 3 to 12 months From 1 to 5 years In RSD thousand Over 5 years Total ASSETS Cash and balances with central banks 21,416,477 21,416,477 Financial assets at FV through profit and loss held-for-trading 23,734 15, ,569 Financial assets available-for-sale 116,894 2,955,585 1,917,915 11,278,068-16,268,461 Financial assets held-to-maturity 53,196 5, ,186 Loans and receivables from banks and other financial organizations 4,194, , , ,952 4,943 5,729,058 Loans and receivables from customers 2,752,009 5,125,549 19,859,831 30,047,654 15,719,350 73,504,393 Other assets 516, ,160 TOTAL ASSETS 29,073,050 8,331,917 22,078,370 42,325,674 15,724, ,533,304 LIABILITIES Financial liabilities at FV through profit and loss held-for-trading 17, ,392 Deposits and other liabilities to banks, other financial organizations and central bank 3,617,208 2,411,887 1, ,030,108 Deposits and other liabilities to other customers 68,579,287 5,649,331 20,570,010 2,229, ,583 97,149,605 Other liabilities 567,586 11,012 8, ,272 TOTAL LIABILITIES 72,781,473 8,072,230 20,579,697 2,229, , ,784,377 Maturity gap as of: 31 December 2017 (43,708,423) 259,687 1,498,673 40,096,280 15,602,710 13,748, December 2016 (36,148,754) (4,518,857) (519,638) 39,980,478 16,070,501 14,863,

105 43. Risk Management (Continued) 43.6 Investment Risk The Bank s investment risk includes the Bank s equity share in legal entities, property, plant and equipment and investment property. Pursuant to the regulations of the National Bank of Serbia, the Risk Management Division monitors the Bank s investment level and compliance with the limits prescribed by the National Bank of Serbia, according to which the Bank s investment in a single non-financial sector entity may not exceed 10% of the Bank s capital, while the total Bank s investments into non-financial sector entities, property, plant, equipment and investment property may not exceed 60% of Bank s regulatory capital. The Bank has regulated investment risk management by implementing adequate policies and accompanying internal acts, and limited the investment risk through adequate system of internal limits. During 2017, the Bank maintained the investment risk indicators within the range prescribed by the National Bank of Serbia Operational Risk Operational risk is the risk of adverse effects to the financial result and capital of the Bank due to failures in performance of operating activities (unintentional and intentional) in the work of employees, inadequate internal procedures and processes, as well as due to unforeseen external events. The Bank cannot expect to eliminate all operational risks, but through a rigorous control framework and by monitoring and responding to potential risks, the Bank is able to manage these risks. The Bank s operational risk management is regulated by the Framework for operational risk management at the level of the entire organisation with the objective to: Promote awareness and management culture regarding operational risks at the Bank s level aiming to contribute to the process efficiency and success of controls; Establish basic standards for operational risk management at the Bank s level aiming to avoid unexpected and disastrous losses, and to minimise expected losses; Ensure that business goals are achieved in the manner which implies controlled risk; Ensure cost-effectiveness of operation by reducing overlaps and by avoiding inadequate, excessive or outdated controls; Ensure consistency with best relevant practice and conformity with regulatory (quantitative and quality) requirements; and Improve the use of capital and improve the return on capital in connection with operational risk. The Bank s operational risk management framework is focused on operations and processes with the aim to have both a proactive and reactive role in operational risk management. The Bank s framework for operational risk management includes: Regular monitoring of exposure to operational risk; Operational risk methodology including risk self assessment and control, key risk indicators and collecting data on losses; and Collection of material operational losses at the Bank s level. The Bank identifies operational risk retroactively (through an entry in a database of the events) and proactively through periodic self-assessment of operational risk. Information on operational risks is collected in all of the Bank s organisational parts. Data are classified and analysed, and methods for risk mitigation and for reduction of its impact are recommended. The Bank has also developed the Business Continuity Plan in order to act timely to unexpected business disruptions of its important functions and to recover their operations is an organised and efficient manner. 103

106 43. Risk Management (Continued) 43.7 Operational Risk (Continued) The aim of the Business Continuity Plan is to: Ensure achievement of desired level of recovery and business continuity; Prevent that the business disruption of one function has a significant impact on the business continuity of another function; Achieve business recovery within the predetermined period for business recovery; Maintain a high degree of readiness to activate and implement the plan and its effectiveness with the aim to recover the Bank s critical process; and Mitigate (if possible) the impact of the potential business disruption and possibility of its occurrence. The Disaster Recovery Plan is developed as a description of procedures that pertain to recovery and continuity of applications, data, hardware, communication and other IT infrastructure in the Bank and implies the existence of an alternative place (disaster recovery site) Information System Risk The information system risk is the possibility of adverse effects on the financial performance and capital, achieving the business results, business in accordance with the regulations and reputation due to inadequate management of the information system or any other system weakness that adversely affects the functionality of the system or safety and/or jeopardizes business continuity. The Bank has adopted the Policy of information security, as well as the Methodology for evaluation and processing of information security risk and treatment of risk, analysis and IS risk monitoring, as well as the measures for their mitigation, prevention and control in accordance with the legal regulations and internal documentation within information technology, as well as the roles and responsibilities in this process. The methodology identified in this document for classification and assessment of the acceptable level of risk is based on ISO/IEC standard. The Bank has prescribed that an employee responsible for information security from the Security Sector prepares the following reports: The report on the level of the Bank s compliance with the Information Security Policy; and The report on security incidents. In addition to above, on a monthly level, reports are submitted to the Director of the Security Sector and the member of the Executive Board, and if necessary, even more often in cases of extraordinary events. IS risk assessment is carried out at least once a year and involves a process in which the competent organizational units of the Bank observe IS risks and inform on the extent to which they are exposed to certain types of IS risks. IS risk assessment allows the owners to timely identify and assess the risks that affect the processes for which they are responsible Capital Management (a) Regulatory Capital The Bank policy is to maintain strong capital base and fulfil minimal capital requirements prescribed by National Bank of Serbia in order to ensure confidence of investors, creditors and market, as well as to support further growth of Bank s business. Recognizing the impact of capital level on shareholders return, Bank has identified the need to maintain the balance between higher returns, that are possible to be achieved with higher leverage, on one hand and advantages and security ensured by continuously high level of capital, on another hand. Bank s policy related to capital management requires maximization of return on equity adjusted for risks, while maintaining regulatory requirements at the same time. 104

107 43. Risk Management (Continued) 43.9 Capital Management (Continued) (a) Regulatory Capital (Continued) National bank of Serbia is regulator/supervisor that prescribes and monitors fulfilment of minimal capital requirements. Capital adequacy is measured as ratio between capital and risk weighted assets of the Bank. According to currently applicable regulations, NBS requires Bank to maintain capital adequacy ratio (CAR) at the minimal level of: 4,5% for Common Equity Tier 1 capital ratio 6% for Tier 1 capital ratio 8% for capital adequacy ratio. Capital represents the sum of Tier 1 and Tier 2 capital, where the Tier 1 capital represents the sum of Common Equity Tier 1 and Additional Tier 1 capital. These levels of regulatory capital are different according to their quality in the sense of their availability to cover risks and losses from Bank s operations, so Tier 1 capital represents the capital available to cover losses on continuous basis during Bank s operations (i.e. going concern capital), while Tier 2 consists of elements that are available to cover risks and losses on gone concern basis. Common Equity Tier 1 capital represents the part of Tier 1 capital of the highest quality and can be used unconditionally, fully and immediately to cover risks and losses form operations as soon as they occur. As of 31 December 2017, the Bank has only elements of capital of highes quality (i.e. Common Equity Tier 1 capital), so all calculated capital adequacy ratios are the same (Common Equity Tier 1, Tier 1 and capital adequacy ratio) and amount to 21,34%. These ratios indicate compliance with the strategic goal of maintaining strong capital position. The following table summarizes the structure of the Bank s regulatory capital as of 31 December 2017 and 2016, as well as the risk/weighted assets and the capital adequacy ratio: In RSD thousand Regulatory capital Core capital 17,286,853 14,351,228 Core shair capital 17,286,853 14,351,228 Supplementary basic capital - Supplementary capital - 99,964 Total 17,286,853 14,451,192 Risk-weighted balance sheet and off-balance sheet assets Balance sheet assets 65,385,067 57,919,912 Off-balance sheet assets 2,312,360 4,088,822 Derivatives that are not traded on the stock market 20,947 33,468 Exposure to operational risk 13,223,275 8,317,133 Exposure to foreign exchange risk - 1,073,858 Exposure to price risk 49, ,542 Exposure to the risk of adjusting credit exposure 14,775 - Total (2) 81,005,899 71,574,735 Indicator of the share capital adequacy ratio 21.34% Indicator of capital adequacy ratio 21.34% 20.05% Capital adequacy (1/2 x 100) 21.34% 20.19% 105

108 43. Risk Management (Continued) 43.9 Capital Management (Continued) (a) Regulatory Capital (Continued) The regulatory capital of the Bank as of 31 December 2017 amounts to RSD 17,286,853 thousand, or EUR 145,914,232 at the official middle rate of the National Bank of Serbia at the balance sheet date (31 December 2016: RSD 14,451,192 thousand and EUR 117,039,951). As of 31 December 2017 the capital adequacy ratio was at level of 21.34% and increased by 2,29 percentage points as compared to the capital adequacy ratio as of 31 December Risk-weighted assets of the Bank in 2017 year has increased for RSD 9,431,164 thousand, based on credit risk was increased for RSD 5,676,172 thousand (the main reason for the increase of RWA is application of new NBS regulation (Basel 3) and decrease of needed reserve to zero), on the basis of operational risk for RSD 4,906,142 thousand (due to change in minimally required capital adequacy ratio from 12% to 8%), on the basis of credit valuation adjustment risk for RSD 14,775 thousands (introduced with the application on new NBS regulation), while on the basis of market risk it was reduced for RSD 1,165,925 thousands (primarily due to reduction in risk weighted assets for FX risk when open FX position is less than 2% of Bank s capital, capital requirement for this risk is not calculated). In the year 2017 the Bank s regulatory capital was increased by RSD 2,835,661 thousand, where decrease of the required reserve in the amount of RSD 4,676,406 thousand had largest positive effect on regulatory capital, and the loss of RSD 2,107,478 thousands had highest negative effect. In line with NBS Decision on accounting write off of balance sheet assets of banks, the Bank has conducted write offs after which share of non-performing loans to clients from non-financial and non-government sectors in total loans to these sectors has decreased and as of 31 December 2017 is less than 10%, for which reason the required reserve was calculated in amount equal to zero. During whole 2017, the Bank s capital adequacy ratio was stable and above the minimal level prescribed by the National Bank of Serbia. Internal Assessment of Capital Adequacy Internal assessment of capital adequacy is the process of assessment of all significant risks to which the Bank is or might be exposed in its operations. The process of internal assessment is conducted in accordance with applicable regulations of the National Bank of Serbia (Decision on Risk Management by Banks) and internal regulations adopted by the competent authorities of the Bank. The process of internal capital adequacy assessment includes the following phases: - Assessment of the risk profile of the Bank for the purposes of ICAAP process; - Identification of risks; - Mapping of risk and materiality assessments; - Valuation and risk measurement, i.e., calculation of internal capital requirements for individual risk; - Determination of total internal capital requirements (prior to the diversification effects) - summing of internal capital requirements for individual risks; - Calculation of the effects of diversification and correlation, as well as determination of total internal capital requirements; - Calculation of the amount of capital in accordance with the Decision on Capital Adequacy of Banks (regulatory capital), available internal capital and capital adequacy ratios; - Comparison of the amount of regulatory capital and the available internal capital, minimum capital requirements and internal capital requirements and capital adequacy ratio; and - Preparation of the reports on ICAAP for the National Bank of Serbia. Determination of the total internal capital available for risk coverage is performed by adding up the capital requirements for individual materially significant risks 106

109 43. Risk Management (Continued) 43.9 Capital Management (Continued) (b) Performance Indicators - Compliance with Legal Requirements The Bank is obliged to reconcile the scope and the structure of its operations and risky placements exposure with the performance indicators prescribed by the Law on Banks and the relevant decisions of the National Bank of Serbia brought on the basis of the aforementioned Law. The Bank's performance indicators as of 31 December 2017 were as follows: Performance Indicators Prescribed Realized 1. Regulatory capital ЕUR Minimum 145,914,232 EUR 10 million 2. Capital adequacy ratio - Common Equity Tier 1 Capital adequacy ratio Minimum 4.5% 21.34% - Tier 1 Capital adequacy ratio Minimum 6% 21.34% - Capital adequacy ratio Minimum 8% 21.34% 3. Permanent investments indicator Maximum 60 % 25.57% 17.27% 4. Exposure to a single entity or a group of related parties Maximum 25% 5. The sum total of all large exposures in relation to the capital Maximum 400% 76,93% 6. Average monthly liquidity ratios: in the first month of the reporting period Minimum in the second month of the reporting period Minimum in the third month of the reporting period Minimum Liquidity coverage ration Minimum 100% % 8. Foreign currency risk ratio Maximum 20% 1.13% As of 31 December 2017, the Bank was in compliance with all prescribed performance indicators Fair Value of Financial Assets and Liabilities It is a policy of the Bank to disclose the information on fair value of those components of assets and liabilities for which published or quoted market prices are readily available, and of those for which the fair value may be materially different than their carrying amounts. The fair value mentioned in the financial statements is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an independent transaction. The fair value is calculated using the market information available at the reporting date, as well as Bank s individual evaluation methods. A market price, where an active market exists, is the best evidence of the fair value of a financial instrument. However, market prices are not available for a significant number of financial assets and liabilities held by the Bank. Therefore, for financial instruments where no market price is available, the fair values of financial assets and liabilities are estimated using present value or other estimation and valuation techniques based on current prevailing market conditions. Since in the Republic of Serbia, sufficient market experience, stability and liquidity do not exist for the purchase and sale of receivables and other financial assets or liabilities, published market prices are presently not readily available. As a result, fair value cannot readily or reliably be determined in the absence of an active market. The Bank s management assesses its overall risk exposure, and in instances in which it estimates that the value of assets stated in its books may not have been realized, it recognizes a provision. In the opinion of the Bank s management, the reported carrying amounts are the most valid and useful reporting values under the present market conditions, as required under the Law on Accounting. The following methods and assumptions were used to estimate the fair values of the Bank s financial instruments as of 31 December 2017 and 2016: Cash and cash equivalents: The carrying amount of cash and cash equivalents approximates their fair value. Loans and receivables from banks and other financial institutions and loans and receivables from clients: The fair value of loans to customers is estimated using discounted cash flow models. The discount rates are based on current market interest rates offered for instruments with similar terms to borrowers of similar credit quality. The fair value for impaired loans is estimated using discounted cash flow analysis or underlying collateral values, where applicable. 107

110 43. Risk Management (Continued) Fair Value of Financial Assets and Liabilities (Continued) Trading and available-for-sale securities: Fair value of trading and available-for-sale assets, which is also the amount recognized in the balance sheet, is based on quoted market prices of the same or comparable instruments. These instruments are included in level 1 of the fair value measurement hierarchy. For debt instruments (Government bonds and Treasury bills), for which such quoted market prices are not available the fair value is estimated using discounted cash flow analysis based on contractual cash flows discounted at the corresponding interest rates. These instruments are included in level 2 of the fair value measurement hierarchy. Derivative financial instruments: All derivatives are recognized on the balance sheet at fair value. For standard forward contracts and options traded on active markets, fair value is based on quoted market prices. For non-traded forward contracts, the fair value is based on dealer quotes and discounted cash flow analysis. Transaction deposits, other deposits and borrowings: Deposits from other banks and customers are mostly on demand or with short-term maturity, all deposits bear variable market interest rates; therefore management of the Bank is of the opinion that the fair value of deposits is equal to their carrying values. The fair value of other borrowed funds is estimated using discounted cash flow analysis based on the Bank s current incremental borrowing rates for similar types of credit arrangements. (a) Financial Instruments not Measured at Fair Value The following table presents the carrying amounts and fair values of the main categories of financial assets and liabilities at the reporting date not measured at fair value and their fair value is not materially different from the carrying amount: In RSD thousand Carrying value Fair value Financial assets Loans and receivables from banks and other 5,729,058 6,577,452 5,729,058 6,577,452 financial organizations Loans and receivables from customers 73,504,393 69,925,874 73,504,393 69,925,874 Financial assets held-to-maturity 59, ,950 59, ,950 Total 79,292,637 76,893,276 79,292,637 76,893,276 Financial liabilities Deposits and other liabilities to banks, other 6,030,108 5,849,696 6,030,108 5,849,696 financial organizations and central bank Deposits and other liabilities to other customers 97,149,605 98,559,912 97,167,817 98,567,922 Total 103,179, ,409, ,197, ,417,618 (b) Financial Instruments Measured at Fair Value IFRS 7 Financial Instruments: Disclosures specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources; unobservable inputs reflect the Group s market assumptions. These two types of inputs have created the following fair value hierarchy, according to which the Bank measures the fair value that reflects the significance of the assumptions (inputs) used in making the measurements: Level 1: Quoted market prices (uncorrected) in active markets for identical instrument. Level 2: Assessment techniques based on the observable inputs that are not the quoted prices from the level 1, whether directly (as prices) or indirectly (derived from prices). This category includes instruments valued through their use: quoted prices in active markets for similar instruments; stated prices for same or similar instruments in the markets considered as less active; or other assessment techniques in which all important inputs are directly or indirectly observable from the market data. Level 3: Assessment techniques used for non-observable inputs. This category includes all instruments relative to which the valuation techniques include inputs not based on observable data and non-observable inputs that have a significant effect on the valuation of the instruments. This category includes instruments valued on the basis of quoted prices of similar instruments with significant non observable adjustments or assumptions necessary to maintain the difference between the instruments. 108

111 43. Risk Management (Continued) Fair Value of Financial Assets and Liabilities (Continued) (b) Financial Instruments Measured at Fair Value (Continued) The fair value hierarchy for the financial assets and liabilities of the Bank measured at fair value as of 31 December 2017 is summarized below: In RSD thousand Level 1 Level 2 Level 3 Total Financial assets Financial assets at fair value through profit and loss - 39,569-39,569 held-for-trading (Note 21) Equity investments (Note 22) 90,829 90,829 Debt securities (Note 22) 16,177,632 16,177,632 Total assets 90,829 16,217,201-16,308,030 Financial liabilities Financial liabilities at fair value through profit and 17,392 17,392 loss held-for-trading (Note 31) Total liabilities - 17,392-17,392 The fair value hierarchy for the financial assets and liabilities of the Bank measured at fair value as of 31 December 2016 is summarized below: In RSD thousand Level 1 Level 2 Level 3 Total Financial assets Financial assets at fair value through profit and loss held-for-trading (Note 21) - 36,958-36,958 Equity investments (Note 22) 83,721-83,721 Debt securities (Note 22) - 21,834,527-21,834,527 Total 83,721 21,871,485-21,955,206 Financial liabilities Financial liabilities at fair value through profit and loss held-for-trading (Note 31) - 17,901-17,901 Total - 17,901-17,

112 44. Related Party Transactions Based on the existing regulatory framework, the Bank is obliged to disclose any transaction which took place during the current fiscal year between all its related parties as defined in IAS 24 Related Party Disclosures. Transactions with the related parties are carried out under the market conditions. Related parties of the Bank include members of the Group the Bank belongs to (NBG Group) and entities over which the Bank has control of or significant influence in. Parties related with the Bank include persons who have a significant influence on the Bank s financial and business decisions. Parties related with the Bank include members of the management bodies, the Board of Directors and the Executive Board of the Bank, their close relatives and companies they own or control, as well as the companies on which financial and business policies they have influence. (a) The following table summarize the total balances of assets and liabilities as of 31 December 2017 and 2016, as well as revenues and expenses arising from transactions with the Bank related parties: Assets Liabilities Income* Expenses* Off balance sheet items Assets Liabilities Income Expenses In RSD thousand Off balance sheet items Shipyard Apatin a.d., Apatin IMOS a.d. Sid National Bank of Greece S.A. Athens , , , ,957 12, ,884 - National Bank of Greece S.A. London , ,547 2,593, ,617 - Stopanska Banka A.D.-Skopje , United Bulgarian Bank A.D. - Sofia (UBB) ,401-7,935 8,797,989 OTP Leasing d.o.o. Belgrade 1,307, ,639 26,134 1,849 27,636 1,094, ,482 14,668 3,288 25,000 OTP Services Belgrade 542, ,654 12, , ,526 90,776 10, ,000 NBG Bank Malta Ltd - - 4, ,970-1,653,675 Banteco EOOD , ,631-6,597 - OTP Bank Srbija a.d Novi Sad ,102 27,878 2,656,249 OTП Bank NYRT - 1,793, ,204, OTP Bank Croatia d.d. - 1, Total 1,850,770 2,368,725 76, ,244 8,942,973 2,354,574 3,249,505 41, ,161 10,531,664 *Note: Disclosed revenues and expenses include incomes and expenses from transactions with NBG group for period from 01.January 2017 to 30.November

113 44. Related Party Transactions (Continued) (b) The table bellow summarizes transactions with the parties related to the Bank: In RSD thousand Loans and receivables 84,179 62,014 Deposits 96,102 67,671 Letters of guarantee, contingent liabilities and other off balance sheet accounts 512 5,492 Interest, fee and commission and other income 3,646 3,278 Interest, fee and commission and other expenses (331) (496) Loans to the related parties were granted under the same terms and conditions, included interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than a normal risk of collectability. (c) Remunerations to the Key Management Personnel Total benefits paid to members of the Board of Directors and the Executive Board in 2017 amounted to RSD 140,735 thousand (2016: RSD 77,342 thousand) and they completely related to short-term benefits (salaries, compensations and other personal income). In RSD thousand Executive Board members 131,416 70,149 Board of Directors members 9,319 7,193 Total 140,735 77, Events after the Reporting Period There were no significant events after the reporting period which would require adjustments or disclosures in the notes to the accompanying financial statements of the Bank as of and for the year ended 31 December Predrag Mihajlović Spyridon Ntallas Svjetlana Radoš President of the Executive Board Member of the Executive Head of Statutory Board/CFO Reporting Department 111

114 Availability of the Financial Statements Availability of the Financial Statements In accordance with the Law on banks, the Bank is publishing short financial statements in one daily newspaper which is distributed on the territory of Republic of Serbia. Short financial statements which are being published are the following: Independent auditor s opinion Balance sheet Income statement Cash flow statement Statement on changes on equity Statement on other comprehensive result Besides that, the Bank publishes full set of financial statements on its website within the page About us as follows: Audit opinion and report on audit of financial statements Balance sheet Income statement Cash flow statement Statement on changes on equity Statement on other comprehensive result Notes to financial statements Annual report Financial statements are published on the website in the Serbian and English languages. 112

115 Annual Report 2017 Annual Report 2017

116 Annual Report 2017 CONTENT 1. OTP Group Introduction by the President of the Executive Board Vojvođanska banka a.d. Novi Sad Macroeconomic Environment and the Banking Sector Development and Financial Position of Vojvođanska banka in Serbia Financial Risk Management Plans for the Future Social Responsibility and Environmental Protection Significant Events after the Reporting Date Organisational structure...29 Appendices

117 Annual Report OTP Group In 1990, the National Savings Bank became a public company with a share capital of HUF 23 billion. Its name was changed to National Savings and Commercial Bank. Subsequently, nonbanking activities were separated from the bank, along with their supporting organizational units. OTP Bank privatization began in Currently the bank is characterized by dispersed ownership by mostly private and institutional (financial) investors. OTP group, as a dominant player on the banking market of Hungary and Central Europe, offers high quality financial services to nearly 15.1 million clients in nine countries. The predecessor of OTP Bank, National Savings Bank (OTP Bank) was established in 1949 as a nation-wide, state-owned, banking entity providing retail deposits and loans. In the ensuing years, its activities and the scope of its authority gradually widened. First, it was authorised to enter into real estate transactions. Later, its role was extended to provide domestic foreign currency accounts and foreign exchange services; there was a subsequent diversification into providing banking services for Hungarian municipalities. Since 1989, the bank has operated as a multi-functional commercial bank. In recent years, OTP Bank completed several acquisitions, making it a key player in the region. Along with Hungary, OTP Group currently operates in eight countries of the region: Bulgaria (DSK Bank), Croatia (OTP banka Hrvatska, Splitska banka), Romania (OTP Bank Romania), Serbia (OTP banka Srbija, Vojvođanska banka), Slovakia (OTP Banka Slovensko), Ukraine (OTP Bank JSC), Montenegro (Crnogorska komercijalna banka) and Russia (OAO OTP Bank). In addition to continuing its retail and municipalities activities, the Bank has been authorized to solicit corporate loan accounts and deposits and to provide commercial loans and banking services for correspondent banking and importexport transactions. 1

118 Annual Report Introduction by the President of the Executive Board sponsorship and joint activities in enhancing national Olympic sport and conditions for our athletes. The Bank thereby confirms its decision to be together with the athletes of Serbia at the upcoming Games in Tokyo, and participate in the creation of one more generation of champions. On the 1st December 2017, Vojvođanska banka became a member of OTP Group, the largest financial service provider in Hungary and a dominant regional player in the Central and Eastern European market as well. This date marks the beginning of creation of a strong integrated bank, which will have in its offer a full spectrum of advanced financial products and services. PREDRAG MIHAJLOVIĆ President of Executive Board Dear Shareholder, With a 150-years long tradition, Vojvođanska banka is successfully operating in Serbia and represents one of the most recognized local brands in the country. The Bank is among the top ten largest banks by asset size with 1,473 employees, broad network of 105 branches and 137 ATMs at the main locations across Serbia. With a capital adequacy ratio significantly above the regulatory threshold, the Bank is highly capitalised and liquid and is among the best transaction banks in the market. The integration of Vojvođanska banka and OTP Banka Srbija, which will according to set plans last until the spring of 2019, will create a strong universal bank in our market. Once integrated, the Bank will be the seventh in the Serbian market by asset size, with more than 5 percent of the market share, over one million clients and the third largest network of branches in the country. I am convinced that by joining forces of the two banks, a most dynamic and most forward looking financial institution on the Serbian market will be created. Qualities of both banks will be used to create more opportunities for our clients, employees and communities, using the financial strength of OTP Group and the integrated bank. Cooperation with the Olympic Committee of Serbia continued in 2017 by signing the fifth consecutive agreement on In forthcoming period, the task of Vojvođanska banka is to ensure continuity of successful business operations, maintain 2

119 Annual Report 2017 product portfolio and be a valuable partner to all its clients. This is equally important as the goal to successfully merge the two banks. Plans for the future are long-term - it's a spirit we nourish with our employees, partners and clients. I am confident that we will achieve our goals, led by professionalism, cooperative and team spirit and great ambition to create a strong and successful bank. I trust that teamwork will enable a quick and successful finish to the upcoming integration process. Sincerely yours, Predrag Mihajlović President of the Executive Board 3

120 Annual Report Vojvođanska banka a.d. Novi Sad About the Bank Vojvođanska banka a.d. Novi Sad, started its business in 1868 as a credit union when the first branch in Sombor was opened. The name Privredna banka, which had years, was changed in 1973 to Vojvođanska banka. The Bank changed its legal form into a joint-stock company in 1995 and became Vojvodjanska Banka a.d. Novi Sad. At the end of 2006, the acquisition of Vojvođanska banka by a group of the National Bank of Greece was carried out, and in 2008 the National Bank of Greece, which operated under that name on the Serbian market, was joined to Vojvođanska banka. Serbian Banks, the Serbian Chamber of Commerce, the Belgrade Chamber of Commerce, the Regional Chamber of Commerce of Novi Sad, the Chamber of Commerce of Vojvodina, the American Chamber of Commerce, the Forum for Responsible Business, Alliance of Economists of Vojvodina, NALED, ACI Serbia, Belibor Panel, as well as the United Nations Global Compact in Serbia. Since June 2017, Vojvođanska banka is a proud member of the UNICEF Friends' Club. During 2017, Vojvođanska banka, by its investments, continued to promote its socially responsible business in Serbia, since its social responsibility arises from a firm and deep conviction and the need to thank to society for trust and good and long cooperation. On December 1, 2017, OTP Bank Serbia announced the completion of the acquisition of 100% ownership of Vojvođanska banka and in this way the Bank became a member of OTP Group whose presence on the market has been in existence for many years and whose plans for the future are also long-term. Vojvođanska banka will continue to operate independently until the spring of By that time, the Bank will be equally committed to its clients, providing quality services, realizing plans and good business results, and working on the process of merging two banks. Vojvođanska banka is a proud member of various business organizations and associations, including the Association of 4

121 Annual Report Macroeconomic Environment and the Banking Sector Better than expected, global economic developments led to an upward revision of GDP growth in euro area, Japan and in emerging economies. Growth in euro area, led mainly by domestic demand, primarily investments under looser monetary conditions, took place in Q2 and continued in Q Due to appreciation of the euro, the projection of inflation growth, in euro area, has been revised down for 2018 and Economic activity continued up in Q2 with GDP growth of 0.7% s-a. Since the economic growth was recorded in most euro area countries, it has become sustainable, though at a somewhat slower pace in Germany and Italy, while growth in France increased slightly, relative to Q1. GDP in the USA rose in Q2, due to the accelerated growth in private consumption and recovery of investments, as well as a positive contribution of net exports. Private consumption was the main driver of the GDP growth in Central European and South Eastern countries as well. Most central banks have kept their interest rates at historically low levels. FED did not change its interest rate target range (1.00%-1.25%), but it started unwinding its balance sheet in October. Positive foreign investor s sentiment regarding Serbia led to appreciation pressures in the domestic foreign exchange market. In 2017 the NBS cut the key policy rate twice, which reflected on a reduction in interest rates in the interbank money market and the prices of dinar government securities. The monetary policy easing, a decline in the country risk premium, the increased interbank competition, the economic growth and recovery in the labour market, helped credit activity accelerate to 5.0% y-o-y in September. Excluding the effect of write-offs, y-o-y growth in the total loan sped up to 9.8%. The share of gross NPLs, declined to the lowest level since January 2009, totalled to 12.2%. Positive fiscal trends continued in Q3, and the budget surplus measured to 2.6% of GDP, at the level of general government. Excluding interest expenses, the general government surplus equalled 5.8% of GDP. Serbia has advanced according to the World Banks Doing Business list for 2018, to 43 rd place. This is a great confirmation of the improvement in business and investment climate. According to the World Economic Forum s Global Competitiveness Report, Serbia advanced the most in terms of macroeconomic environment indicators (by 31 positions), which was mostly contributed by a low and stable inflation, the reduction in the budget deficit, a growing share of national savings in the gross domestic product and a more favourable credit rating of the country. In terms of achieved inflation, in 2017 Serbia retained the first place, shared with another 35 countries. Economic Activity Under a new projection of the NBS, GDP growth is likely to reach around 2% in

122 Annual Report 2017 and accelerate to around 3.5% in 2018 and GDP growth was driven by the effects of continued activation of investments and elevated external demand. Acceleration of manufacturing and further recovery of the mining-energy complex exerted the strongest impact on a faster growth of GDP. Inflation Since the start of the year, inflation was moving within the target tolerance band of 3±1.5%. In Q it decelerated due to the expected low y-o-y rise in the prices of energy and food on account of the base effect from prices of petroleum products and meat. Headline and core inflation decelerated in Q3 more than expected, while inflation expectations of the financial sector and corporates were lowered further, indicating that low inflationary pressures will continue. The effect of the drought on inflation were lesser than expected, and lower import prices expressed in dinars acted as a drought on inflation. In the first half of 2018, inflation will be slowed by the high base for prices of petroleum products and other products that recorded a one-off hike in 2017, guiding inflation to move below the target midpoint. Rising prices of primary agricultural commodities and aggregate demand will work in the opposite direction. The risks to the projected inflation path are symmetric and relate to future developments in the international commodity and financial markets and, to a degree, administered price growht. Monetary Policy During 2017, the NBS trimmed the key policy rate by 0,5 pp taking into consideration the medium-term inflation projections and considering new information on domestic and foreign economic developments. The key policy rate was lowered last time in October, to 3.5%. The deacrese in the key policy rate caused as well as lower average repo 6

123 Annual Report 2017 rate, and interest rates in the interbank money market. The Fiscal Deficit and the Current Account Deficit Exchange Rate Appreciation pressures were primarily due to a better export performance, a high inflow of foreign direct investment, greater interest of foreign investors in government securities, relatively high purchase of foreign cash and a growth in FX-indexed bank assets. Dinar strengthened by 3.5% against the euro, and by 14.3% against the dollar, owing mainly to the considerable appreciation of the euro visà-vis the dollar. Since early 2017, the general government surplus came at RSD 82 bn vs. a RSD 4.3 bn deficit in the same period last year. The quantitative criterion under the seventh review of the arrangement with the IMF envisaged a balanced fiscal result of the general government for the period observed, and a deficit of up to 1.1% of GDP in 2017 as a whole. Excluding interest expenses, the general government surplus came at 5.8% of GDP. In y-o-y terms, total revenue increased by 3.9% in real terms as at end-september, resulting mainly from rising receipts on profit tax, stemming from higher profitability of enterprises last year, higher allocated social insurance contributions reflecting labour market recovery, and rising VAT receipts on account of the economic upturn and improved collection. At the same time, expenditures fell by 2.3% in real y-o-y terms, in response to smaller interest repayments. 7

124 Annual Report 2017 External debt and public debt At end-september 2017, central government public debt equalled EUR 24.1 bn, by over EUR 700 mn less than at end Its share in projected GDP amounted to 64.6%, vs. 71.9% at end Foreign Trade A dispersed growth in goods and services exports was recorded during the first three quarters of 2017, while imports contracted in Q3, which led to a positive 0.7 pp contribution of net exports to GDP growth. Strong external demand provided a positive boost to domestic exports growth, so as the expansion of production capacities on the back of investment from earlier years. The major share of public debt is still in foreign currency out of which EUR is 40.5%, USD 31.4%, RSD 22.3%, SDR 3.3%, CHF 0.5% and other 2.1%. Serbia s state budget recorded a surplus of around RSD 66.6 bn in the first nine months of Revenues recorded amounted to RSD bn, while expenditures were RSD bn according to preliminary data for Q Banking Sector At end of September 2017, the Serbian banking sector numbered 30 banks consisting of 1,671 organisational units and employed a total of 23,342 persons (505 less than in ). 8

125 Annual Report 2017 At end of September 2017, total net balance sheet assets of the Serbian banking sector equalled RSD 3,293.3 billion, and total capital RSD billion. The main sources of financing of the banking sector in Serbia are still received deposits, which share in total liabilities was 69.4%. Bank s own sources of financing amounted to 20.1%, while borrowings constituted 7.1% of liabilities. Total deposits at the end of the third quarter amounted to RSD 2,286 billion (an increase of 2.7% as compared to the Q2 2017). FX and FX indexed deposits participated with 69.1% in total deposits. Sight deposits are still dominating in total deposits with 60.7%, while deposits with maturity up to 1 year participate with 31.7% and those with maturity over 1 year participates with minor 7,6%. Net result before taxes in the overall banking sector achieved in the first nine months of 2017 amounted to RSD 53.5 billion, representing an increase of 63.1% compared to the same period last year. A positive result was reported by 25 banks with total profit of RSD 54.7 billion, while 5 banks operated with a loss of RSD 1.2 billion. Changes in key elements of banking sector profitability (in RSD mln) Change Net interest % Net fees % Credit losses % Exchange rate effect % Result % In Q3 2017, ROA was 2.18% (0.77 pp higher than in Q3 2016), while ROE was 11.01% (4.12 pp higher than in 2016). The gross NPL loans at the end of the third quarter of 2017 decreased by RSD 67.9 billion, and totalled to RSD billion. Total net loans of the banking sector in Serbia at the end of the third quarter of 2017 increased by 4.2% comparing to previous quarter. FX and FX-indexed loans participated with 69.1% in total loans. 9

126 Annual Report 2017 At the end of the third quarter of 2017, the coverage of total NPL by reserve for estimated losses on balance sheet items was 127.2%, while 62.2% of the NPLs were covered with a provision for impairment of loans made in accordance with international accounting standards. The Serbian banking sector is well capitalised. At the end of September 2017, capital adequacy ratio of the Serbian banking sector averaged 22.46%, well above the regulatory minimum (12%) and above the Basel minimum standards (8%). Regulatory capital consists of: 95.6% of Tier I or core capital and 4.4% of Tier 2 or supplementary capital. The Serbian banking sector is still characterized by very high liquidity. At the end of the third quarter of 2017, the average monthly liquidity ratio stood at 2.21% (regulatory minimum is 1%), while the narrower liquidity ratio stood at 1.84% (regulatory minimum is 0.7%). 10

127 Annual Report Development and Financial Position of Vojvođanska banka in Serbia In 000 RSD Income Statement Net interest income 4,871,147 4,803,190 Net fees and commissions income 1,634,905 1,759,852 Operating expenses* -6,115,637-6,977,526 Profit (loss) before tax 343,494-2,058,137 Profit (loss) after tax 301,037-2,107,478 Adjusted profit after tax ** 301, ,794 Balance Sheet Cash and balances with central bank 20,922,329 21,416,477 Loans and receivables 76,503,326 79,233,451 Assets available for sale and held to maturity 22,308,198 16,327,647 Other assets 6,164,146 5,750,218 Total Assets 125,897, ,727,793 Deposits and other liabilities to other banks, financial organizations, central bank and other customers 104,409, ,179,713 Reserves 411, ,207 Other liabilities 1,101, ,144 Total liabilities 105,921, ,758,064 Total equity 19,976,019 17,969,729 Total liabilities and equity 125,897, ,727,793 Key performance indicators Capital adequacy ratio (CAD) 20,19% 21,34% Net interest margin (total assets %) 3,96% 3,86% adjusted ROA** 0,24% 0,53% adjusted ROE** 1,71% 3,20% Number of employees Number of branches and sub branches Market share 3,9% 3,8%*** * Operating expenses include wages, salaries and other personnel expenses, depreciation costs and other expenses **The result and indicators for 2017 are adjusted for expenses related to integration and harmonization whithin new Group *** as of Note: Balance Sheet and Income Statement are given in more details in Appendix 1 and Appendix 2 11

128 Annual Report 2017 Balance sheet assets as of amount to 122,728 million dinars. Stable business resulted in a sustained market share in the total banking sector assets of ~ 3.8%. Present market trend of lowering interest rates reflected on Banks lower total interest income in 2017 comparing to During 2017, the process of the takeover of Vojvođanska banka by the OTP Group resulted in a one-off increase in expenses (harmonization with Group's standards), which resulted in a negative business result. If these one-off expenses were excluded, the Bank's business result would have been positive and amounted to ~ 661million dinars. Decrease in net interest income of 1.4% compared to 2016, as a result of lower interest rates and pressure of competition on margins, was compensated by growth in net fees and commissions income for 8% compared to the previous year. The Bank succeeded to improve capital adequacy ratio during 2017, which amounts to 21.34% as of Income Statement The Bank realized positive operating result (before impairments and taxes) in the amount of 205 million RSD. Income Mitigation of monetary politics through the reference interest rate reflected on a decrease of average repo rates as well as decrease of interest rates on the banking market. In the total interest income structure, interest income on loans and securities took the most significant part. During 2017, growth in the average securities portfolio compared to 2016, did not lead to growth in interest income of securities, due to changes in currency structure and lower interest rates. The Bank recorded a decrease of interest income on securities by ~ 16%. Loan interest income decreased by 6% in 2017 compared to 2016, due to a drop of interest rates although the average balance of non-performing loans was higher in Interest income on cash loans, and loans for working capital and liquidity participate with 67% in total loans interest income. 12

129 Annual Report 2017 In 2017, fees and commissions income reached RSD million, which presents a growth of 6% opposed to year Vojvođanska banka has a long tradition of transaction banking that is reflected in stable income from fees and commissions. In the structure of interest expenses, the majority are deposits interest expenses. Term retail deposits and other deposits took the largest part in deposits expenses (78% in total). Expenses Total interest expenses decreased by 32% in 2017 compared to

130 Annual Report 2017 In the structure of operating expenses, the majority are other expenses ~61%. Wages, salaries and other personnel expenses contribute to 34% of total operating expenses, while depreciation costs account for 5% of total operating expenses. loans and maintain the achieved level of foreign currency liquidity. Loans and Receivables from Banks and Other Financial Institutions Balance Sheet Vojvođanska banka, despite the decrease of its assets by RSD million, managed to maintain its position in the banking market, still ranking in the top ten banks in Serbia. Detailed positions of Balance Sheet are in Appendix 1. Financial Assets Available for Sale Loans and receivables to banks and other financial institutions were reduced by ~ 13% in 2017, in line with the achieved level of deposit and credit activities of the Bank, in order to achieve greater profitability of total business. Loans and Receivables to Customers Financial assets available for sale, as of 31 st of December recorded a decrease of 26% compared to while the average balances were higher comparing to previous year. The Bank reduced the level of investments in government bonds in the last quarter in order to increase the volume of RSD cash Vojvođanska banka decreased the level of gross loans and receivables to customers for ~3.3% in 2017, comparing to the previous year. The decrease of gross loans is the consequence of the implementation of the Decision on accounting write-off of assets prescribed by the NBS. Non-performing loans with 14

131 Annual Report % impairments were transferred to the off-balance sheet of the Bank in the amount of ~ 5.5 billion dinars. Deposits The decrease in deposits affected positively the profitability of the business, while reducing the surplus of liquidity. The deposit level in 2017 was adequate to lending activities of the Bank as well as the investment to securities. In the structure of gross loans, corporate loans contribute with a share of 49%. The largest part of corporate loans is loans with a foreign currency clause and foreign currency loans. Mortgage loans and dinar consumer loans took the largest part of gross retail loans (35% and 59%, respectively). Transactional deposits participate with 31% in total deposits while term retail deposits have largest contribution of 51%. FX deposits participate with 61% in total customer deposits, with the largest part referring to retail term FX deposits. On the other hand, deposits in local currency mostly come from legal entities. The ratio of gross loans to deposits from customers amounted to 81% as of

132 Annual Report 2017 application processing, loan maintenance and early repayment, makes this offer attractive and transparent on the market, with an effective interest rate that is almost equal to the nominal one. Retail Banking Vojvođanska banka has succeeded in increasing gross loans to households for 7.7% and maintaining a market share of 4.7% in Favourable trends are the result of finding the optimal level of price and product combinations. Special campaign was organised for cash loans, which was reflected in cash loan increase of 18% compared to the previous year. With a new cash loan customers have the opportunity to dispose of the cash according to their needs, because the loan does not include the requirement of proving the specific purpose of its utilisation. The new offer of a three-zero cash loan, that is, without the cost of During 2017, the banking sector was characterized by a decrease in housing loans of ~ 1% as compared to Vojvođanska banka managed to maintain the level of housing loans, even increasing its share from 3.6% to 3.7% in 2017 as compared to A special offer of housing loans in Vojvođanska banka is characterized by a competitive interest rate as well as the release from the processing cost of applications for housing loans. In 2017, in the spirit of its tradition, Vojvođanska banka organized a series of special benefits for credit and debit card users. Performance and customer satisfaction are reflected in the growth of volume and number of transactions by 22% compared to the previous year. In 2017, Vojvođanska banka enriched its offer with a new package of products and services for Small Business customers such as no interest current account overdraft, financial consulting, SMS notifications and statement delivery on daily level, e-banking, up to 15 free electronic orders per month and a number of other services inspired by the challenges and needs that Small Business clients face in everyday business. The Bank continued to improve the website, as well as ATM services, which enable customers to quickly and easily obtain information, as well as easy payment (loan payments, payments for 16

133 Annual Report 2017 Visa and MasterCard cards), inspection of debt and account balance and a number of other functionalities with reduced fees applied to realized transactions. Clients were also enabled to pay administrative fees with cards owing to a developed software solution, simply and quickly at a counter in Novi Beograd (the municipality of Novi Beograd is the municipality with the highest amount of payments of administrative fees in Serbia). Vojvođanska banka decreased Retail deposits during 2017 by 4% compared to 2016, retaining its market share at around the similar level as in previous years - above 5%. Total gross corporate loans decreased by ~ 10% in 2017 as a consequence of the conducted accounting write-off. The largest part of approved loans was related to loans for working capital, which continued the trend from previous years. FX indexed loans accounted for the largest portion of approved and disbursed loans. The total volume of disbursed loans is 4% higher than in the previous year. Corporate Banking The basic goal in corporate business during 2017 was maintaining long-term relationships with clients and providing quality services and diverse products. 17

134 Annual Report Financial Risk Management General Framework Activities related to risk management at all organizational levels are guided by the mission of realizing shareholder value by optimizing the risk to return ratio, taking into account the interests of customers and employees in a manner that is consistent with best practice and compliance with regulatory requirements, as well as with business strategy and the Bank's policies. With the support of the OTP Group risk management bodies, the Bank has established a comprehensive risk management system, which is in accordance with the Group's principles. The risk management structure is organized in accordance with the Law on Banks, the relevant decisions of the National Bank of Serbia, which define the area of risk management and capital adequacy, as well as the Bank's Risk Management Strategy. The Bank's risk management strategy sets the foundation on which the Bank builds the culture of risk management (risk appetite, terminology, principles, policies and procedures and its attitude towards risk management). The general objectives of the Bank s risk management are: Establishment of basic principles and standards for risk management in the Bank; Support to the Bank's business strategy by ensuring that business goals are achieved with a controlled risk; Improvement of the use and allocation of capital and increase of revenue from invested capital adjusted to risks by including risk in the measurement of business performance; Support to the decision-making process by providing the necessary information relating to the risks; Ensuring consistency with best practices and compliance with local regulatory, quantitative and qualitative requirements; Establishing functional relationships with the function responsible for risk management at the level of the OTP Group and the contribution of the positioning of the OTP group in South-eastern Europe; Promoting awareness of risk and of the culture of risk management at the level of the OTP Group. Credit Risk The basic method of mitigating credit risk is ensuring the collateral for a loan. The Bank's credit policies determine the types of eligible collateral in the form of funded and unfunded credit protection, whereas the conditions to obtain these collaterals, as well as the 18

135 Annual Report 2017 ratios for calculating the secured values in relation to the type of collateral for the purposes of loan processing, are in more detail regulated by other internal documents of the Bank. The main types of collateral used by the Bank for the purposes of mitigating credit risk are: residential property mortgage, business property mortgage, pledge on equipment, inventory and receivables, letters of guarantee, financial assets (cash, securities) and sureties. Exposure to credit risk with balance sheet items (positions) is presented in Appendix 3 table. The Bank realized a significant decrease of the NPL indicator in 2017, resulting in the value of the indicator of 8.43% as of , as per the methodology of the National Bank of Serbia. The performance indicator was lower than last year by 10 percentage points, and also significantly lower than the NPL indicators of the banking sector, which amounted to 12.2% in the third quarter. The decrease in NPL indicators is caused by the accounting write-off fully impaired bad assets, favoravable NPLs formations, as well as an increase in the performing loan portfolio. and assess the impact of changes in market risk factors in a manner These measurement systems include VaR models for the most important currencies and models where appropriate; Operational limits and other practices which ensure that exposures remain within levels that are in accordance with internal policies in terms of exposure to individual market risk types, positions and loss limits; Measurement of sensitivity to loss under stressful market conditions and taking into account those results when establishing and reviewing policies and limits for market risks; Adequate and efficient processes and information systems for measuring, monitoring, controlling and reporting on market risk exposure. Controls (limits) are incorporated in those systems. Reports are regularly made and submitted to the Board of Directors, the Executive Board, the Senior Management and all other relevant competent bodies. Market Risk The Bank has established and further maintains the proper function of measuring, monitoring and controlling market risk, including: The processes of measuring the market risks that record all significant sources of market risk Interest Rate Risk The basic instrument of interest rate risk management is monitoring the mismatch between interest sensitive assets and liabilities. The Bank regularly monitors and determines the impact of changes in interest rates on net income and the economic value of equity. The acceptable interest rate risk level is 19

136 Annual Report 2017 defined by limits of mismatch between interest sensitive assets and liabilities. The exposure to interest rate risk in balance sheet items is presented in Appendix 4 as a table. Foreign Exchange Risk Foreign currency risk is the ratio between the total open foreign currency position and the Bank's capital calculated in accordance with regulations governing capital adequacy. Aiming at the protection against foreign exchange risk, the Bank monitors daily changes in the market, implementing a policy of low exposure to foreign currency risk and monitoring results obtained during simulations of stress scenarios. Liquidity Risk The Bank manages foreign exchange risk by limiting and daily monitoring the alignment of this position with the limit. In addition to this, the Bank daily measures the foreign exchange risk indicator pursuant to the regulations of the National Bank of Serbia and maintains it within the prescribed limits. An Assets and Liabilities currency breakdown is presented in Appendix 5. The Bank has set the framework for liquidity risk management in the Policy for Liquidity Risk Management defining roles and responsibilities in the liquidity management process, with the aim of providing various sources of financing, corresponding management of the assets and liabilities structure, and the constant monitoring of future cash flows and liquidity on a daily basis. 20

137 Annual Report 2017 The Bank daily estimates the expected cash flows in dinars and in foreign currencies, and maintains certain amounts of liquid assets which can easily be convert to cash. A table of assets and liabilities per maturity is shown in Appendix 6. In order to better manage its sources of funds, the Bank devotes special attention to the monitoring and, measuring the concentration of deposits per different levels and types of deposits. Country Risk The Bank has established perimeters for countries to limit the placement of funds and exposure to country risk, as well as the defined methodology for measuring and determining such exposures. In addition, the Bank has established a methodology for calculating the provision for country risk exposure conducting a responsible policy towards the countries risk. Operational Risk The Bank's operational risk management is regulated by the Framework for operational risk management at the level of the entire organisation with the objective to have both a proactive and 21

138 Annual Report 2017 reactive role in operational risk management. The Bank has also developed the Business Continuity Plan in order to act timely in response to unexpected business disruptions of its crucial functions. The Disaster Recovery Plan is developed as a description of procedures that pertain to recovery and continuity of applications, data, hardware, communication and other IT infrastructure in the Bank and implies the existence of an alternative place (place for recovery from disaster). Capital Management The Bank continuously monitors its capital, in order to: Act in accordance with the requirements of the National Bank of Serbia regarding the maintenance of the minimum prescribed capital; framework for capital management by adopting the Capital Management Strategy, consistent with the Bank s business strategy. Assessment and measurement of the taken risks, as well as the adequacy of the capital base as opposed to those risks, is performed not only for the types of risk defined by the regulator, but also for all other types of risks in the Bank. This measurement is performed within the Internal Capital Adequacy Assessment Process (ICAAP) and involves the measuring according to the type of risk in the normal course of business, as well as in stressful conditions, for all types of risks that are considered material. An overview of performance indicators as per the limits prescribed by the National Bank of Serbia are presented in Appendix Ensure the adequate capital level that provides operations on a continuous basis; Maintain a strong capital base that corresponds to the level of anticipated risks in the existing and planned operations. The Bank's management regularly monitors the level and conformity of the Bank's capital adequacy ratio, as well as other indicators set by the National Bank of Serbia. The Bank has established a 22

139 Annual Report Plans for the Future Vojvođanska banka has defined the following strategic objectives for the period of : 23

140 Annual Report Social Responsibility and Environmental Protection During 2017, Vojvođanska banka continuously kept on striving to promote corporate social responsibility in Serbia. For Vojvođanska banka, it represents an important part of a long-term business strategy. By establishing cooperation with stakeholders from public and non-profit sectors, we put an effort to directly influence resolving of problems, with the aim to achive welfare in the community in which we operate. Olympic Committee of Serbia Since 2004, Vojvođanska banka has actively supported the Olympic Committee of Serbia, striving to promote sports and sport spirit. After perennial support to our sportsmen, Vojvođanska banka has continued to be the official bank of our national Olympic team at the 2020 Tokyo Games as well. During 2017, we signed the fifth in a row Sponsorship Agreement with the Olympic Committee of Serbia, with a desire to provide the best possible conditions to our sportsmen for trainings and participation in the competitions within Olympic cycle. During 2017, as in the past years also, we continued to gather a part of resources of each transaction made with VISA Olympic Card, which we donated to the Olympic team with the aim of achieving significant sport results. The Project of the Social Inclusion for children without parental care Since March 2016, Vojvođanska banka has been the general donor of the project of social inclusion of children without parental care Budi svoj, implemented by the Uključi se foundation and with the support of the Ministry of Labour, Employment, Veteran and Social Affairs and the Ministry of Youth and Sport. Vojvođanska banka allocates money resources on a monthly level for the implementation of this project. The project is composed of three segments: A cycle of 7 workshops with the aim to strengthen soft skills the Predstavi sve event is organized at the end of each cycle where the young present themselves to potential employers. During 2017, these events were organized in Niš and Novi Sad. 24

141 Annual Report 2017 Gradimo snove an Internet platform through which children without parental care share their experiences. Budi svoj na selu a rural household where the young are supposed to live with the aim to lern how to live at the countryside. During 2017, activities regarding the refurbishment of the house in Jankov Most were performed, where the young are supposed to move in. second time as an institutional patron of its Friends of the Gallery of Matica Srpska Club at the celebration of 170 years since its establishment. Gallery of Matica Srpska In June 2016, Vojvođanska banka established cooperation with the Gallery of Matica Srpska. By this cooperation, it is envisaged that the Bank shall allocate resources for the refurbishment of façade of the Gallery of Matica Srpska building in Novi Sad and for the construction of an external lift for persons with disabilities, while in return the professional of the Gallery shall make a list, a catalogue and valorise more than 600 pieces of art owned by Vojvođanska banka. In March 2017, the Diplomacy&Commerce magazine handed the Business&Art award to Vojvođanska banka for its cooperation with the Gallery of Matica Srpska, while in October 2017 the Gallery classified Vojvođanska banka for the During 2017, the Responsibly in Culture exhibition was organized in the exhibition premises of the National Bank of Serbia in Belgrade in the period April-May On that occasion, the Belgrade audience also had a possibility to become acquainted with the rich art collection owned by Vojvođanska banka. After Belgrade, a part of this exhibition became a traveling exibition, so 5 mostsignificant pieces were exposed in 5 branches of Vojvođanska banka within the Caravan of Paintings exhibition. The paintings were exhibited in the period June-September 2017 in Kragujevac, Čačak, Apatin, Zrenjanin and Subotica. In December 2017, we jointly participated in cooperation with the Gallery s professionals in the Most Beautifully Decorated Christmas Tree competition, traditionally organized for 21 years in a row by Hyatt Regency hotel in Belgrade, which had a charity character. The Bank s employees, together with the Gallery s professionals, jointly decorated the Christmas tree, and the unique decorations were created for that 25

142 Annual Report 2017 occasion by the curators of the Gallery of Matica Srpska. On that occasion, a creative workshop Feel the Art was organized for children of Vojvođanska bank s employees. The Internet community recognized the Christmas tree of Vojvođanska banka as the most beautiful, as the Christmas tree gained the largest number of likes on the popular social network Facebook. United Nations Children s Fund UNICEF Since June 2017, Vojvođanska banka has been a proud member of the Friends of UNICEF Club. The Bank decided to allocate money on a monthly level for operations of this important international organization in Serbia. Also, the Bank enabled its clients to also have an opportunity to support UNICEF through a standing order service, for which the Bank gave up on the commission. As an additional support to UNICEF in Serbia, in December 2017 Vojvodjanska Bank donated 3 million dinar for UNICEF s Sport for All programme, which would be used for the implementation of this project in 3 municipalities in Serbia. Corporate Volunteering Vojvođanska banka, as an active member of the Responsible Business Forum, in 2016 for the first time joined a great volunteering campaign Naš Beograd. During the campaign volunteers enhanced conditions in the comunity in which we operate. The Bank also joined this initiative in May 2017, when on one Saturday the Bank s employees were cleaning the Zvezdara forest in Belgrade, and were colouring benches, tables and bins. In this way the corporate volunteering season officially started. Mi smo tim is a volunteering programme of Vojvođanska banka established in In cooperation with colleagues from five regions of Vojvođanska banka s branch network, five volunteering activities were organized: South Vojvodina region the village of Čestereg support to the socially vulnerable family (gathering of goods and money, colouring fences and a gate in their family house). Vojvodjanska Bank, after this volunteering activity, decided to provide this family first summer vacation in Igalo, Montenegro. Belgrade region Sremčica colouring benches and a pagoda in the yard of the Institution for Children and Youth Sremčica. Besides the inclusion of employees, Vojvođanska banka donated money resources to this institution for reconstruction of the roof of the pagoda. 26

143 Annual Report 2017 East Serbia region Kragujevac colouring of benches, a pagoda and a fence in the Elementary School Milutin i Draginja Todorović in Kragujevac. West Serbia region Bajina Bašta arranging and cleaning the riverside of the Drina River at many locations near Bajina Bašta. By this activity, the Bank supported the world s initiative Clean Up the World. North Vojvodina region the village of Djurdjin colouring of benches and a fence in the Elementary School Vladimir Nazor in the village of Djurdjin near Subotica. A total of 133 volunteers of Vojvodjanska Bank during 2017 donated 572 hours in 6 local communities, and therefore gave their contribution for the betterment of life conditions of many thousands of our fellow citizens. The Responsible Business Forum, as the most important network in the corporate social responsibility sphere, has recognized the efforts of Vojvodjanska Bank for investing in employees volunteering and handed the Corporate Volunteering Award to the Bank in the Best Newly Established Corporate Volunteering Programme category at the eighth international CSR Forum in December On the same occasion, Vojvođanska banka received a Thank You Note for participating in the Naš Beograd volunteering campaign. Non-Financial Reporting Vojvođanska banka, from year to year, recognizes the importance of the nonfinancial reporting, i.e. reporting on corporate social responsibilities and sustainable business. Besides already established reporting to the Group within which it operates, and completing various questionnaires on corporate social responsibility, the Bank published for the first time the Sustainable Business Report in 2017, which was written under G4 version of the GRI (Global Reporting Initiative) methodology of non-financial reporting. The Responsible Business Forum handed a distinction to Vojvođanska banka for reporting under this standard, and therefore it listed it among only 11 companies in Serbia (4 in the banking sector) which published non-financial reports in 2017 by using the GRI methodology. 27

144 Annual Report 2017 Donations Donations in the form of goods and money represent one of the oldest and the most significant philanthropic activities of every corporate social responsible company. During 2017, Vojvođanska banka donated 263 repaired computers to health, cultural and educational institutions across Serbia. Also, the money donations during the same year surpassed 11 million dinars. Responsibility for the Environment representative objects in the period 8.30 p.m p.m. in cities where this campaign was organized. 9. Significant Events after the Reporting Date There were no significant events and information after the reporting date which would require corrections or disclosure for the fiscal year of The Bank did not have any purchase of own shares in The environmental protection represents an important segment of operations of Vojvođanska banka, by creating programmes of energy and materials savings, by recycling decommissioned fixed assets, by adequate waste management, by applying the models of environmental risks assessment in investment and credit processes, as well as by an active participation in local and global initiatives. Vojvođanska banka strategically strives to contribute in promotion of responsible approach of environmental protection. During 2017, we supported twice the Just Not by Car campaign, when our colleagues came to work by ecological (sustainable) means of transport, with the aim to draw attention to environmental protection, as well as to consequences of excessive consumption of limited natural resources. In March 2017, Vojvođanska banka supported the World Wildlife Fund (WWF) initiative titled the Earth Hour, by turning off the façade lightning on its 28

145 Annual Report Organisational structure EMPLOYEE STRUCTURE IN VOJVOĐANSKA: number of employees: average age: 46 number of female/ male employees: / 412 University level education: 765 Board of Directors Internal Audit Compliance Divisions Executive Board Treasury Brokerage & Advisory Corporate banking Retail products & segments Network Security Property Management Operations Procurement Information Technology Credit risk Risk Management Management Troubled Assets Management Finance Human resources Legal affairs Marketing & Communication Corporate Social Responsibility Executive Board's office 29

146 Annual Report 2017 In 2017, human resources continued to conduct continuous training and training of employees for their personal and professional development and retention of talents in order to ensure overall quality of business. I One of the programs implemented by HR was the VB Academy for six months, with the aim of enabling young and highly educated colleagues with a great potential to further develop and take over positions that appear as critical to competitiveness in the future. The aim of the Academy's implementation was to contribute to the development of the individual as well as the formation of a team spirit through training provided by internal and external lecturers as well as through the exchange of knowledge and experience of the participants. Predrag Mihajlović Spyridon Ntallas Živko Popov President of the Executive Board Member of the Executive Board/CFO Assistance CFO 30